Friday, December 28, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 28th, 2012
In reverence of Peter Drucker ("Nobody predicts the future -- the idea is a firm grasp of the present") no predictions here for the New Year. Just prioritize the puzzles ahead, the things to watch. Nothing in 2013, no issue at all compares to the need for fiscal repair. The Fed can for another year buy our new debt, but now we must make progress. And the Fiscal Cliff is a preliminary, only the first turn in a large maze.
None of us can know another's mind, and even first-hand reporters can misunderstand intentions. And political matters today are touchy almost beyond discussion. However, the mind of the President is central to the fiscal issue.
A high level of frustration for Mr. Obama is now two years old. His priorities -- stimulus spending, ObamaCare, and Dodd-Frank -- were all in place by the end of 2010. That November Republicans took the House, and his Fiscal Commission (Bowles-Simpson) delivered recommendations he cannot accept (although he has not said exactly why). Since the end of 2010 the White House has been nearly inert, without achievement, except for its part of the 2011 fiscal fiasco with Congress.
Once re-elected, feelings of mandate and confirmation were justified, although Mr. Obama ran more against Mr. Romney than for a specific program, except for raising taxes on those households earning more than $250,000. In the last two years, not even Ahab had it in for a whale as Mr. Obama has had it in for this group.
The Fiscal Cliff negotiations since the election are a mystery to me. The basic issues are a minor skirmish compared to the debt-limit fight two months ahead, and the inevitable big-money -- really big -- battle on Bowles-Simpson ground which will consume most of Mr. Obama's second term.
Why the total lock-up on the Cliff? What for? Polling places had barely closed before Republicans conceded on new revenue, and then their leadership re-conceded farther than the rank and file could stand. The concessions were met by White House demand for new revenue 3:1 in excess of spending cuts, while the Bowles-Simpson touchstone is 2:1 the other way, cuts over spending.
The only first-person accounts of negotiations inside the White House that I know of appeared in the WSJ on Saturday, December 15. In news pages, not Op-Ed, and based on notes taken by participants. This testimony describes Mr. Obama as tougher in private than in public, over the edge to insulting, goading Mr. Boehner into a walkout which he managed to resist. But, why? The President and most media have succeeded in demonizing Republicans, but to what purpose? They still hold a veto in the House.
Compromise does not mean that you get what you want. Ron Reagan cut deals with Tip O'Neill, but the price was larger government in each of his terms. Bill Clinton spoke his own frustration: the '93 fiscal deal meant he had to be an "Eisenhower Republican." Daddy Bush's fiscal deal was a great thing for the country, but cost him the job. Lyndon Johnson was not the king of bludgeoning Republicans, and Dixiecrats in his own party, but a magician of horse-trading.
In our government, compromise must begin with the President. The Republicans are of course at fault in their wishes for unaffordable spending on defense, and too-low taxes, but no compromise of the magnitude necessary now has ever come forth from Congress. Gravy did not flow from your turkey; it was the work of a skilled cook.
I wish not to say what I think I see: Mr. Obama intends to break the Republicans. Break their will now, so badly that Democrats will take the House in two years. The means: refuse resolution of the Fiscal Cliff and debt limit on terms Republicans can bear, and blame the Republicans for failure. And then Ahab will be free to pursue a tax-heavy defense of indefensible entitlements. I hope this conclusion is mistaken.
Sam Rayburn, master of the House, to fellow-Texan Lyndon Johnson upon his ascent to Senate Majority Leader: "Lyndon, don't tell anybody to go to hell unless you can make 'im go." How Mr. Obama manages to balance his frustration and righteousness with the need for compromise will tell the tale in 2013.
In reverence of Peter Drucker ("Nobody predicts the future -- the idea is a firm grasp of the present") no predictions here for the New Year. Just prioritize the puzzles ahead, the things to watch. Nothing in 2013, no issue at all compares to the need for fiscal repair. The Fed can for another year buy our new debt, but now we must make progress. And the Fiscal Cliff is a preliminary, only the first turn in a large maze.
None of us can know another's mind, and even first-hand reporters can misunderstand intentions. And political matters today are touchy almost beyond discussion. However, the mind of the President is central to the fiscal issue.
A high level of frustration for Mr. Obama is now two years old. His priorities -- stimulus spending, ObamaCare, and Dodd-Frank -- were all in place by the end of 2010. That November Republicans took the House, and his Fiscal Commission (Bowles-Simpson) delivered recommendations he cannot accept (although he has not said exactly why). Since the end of 2010 the White House has been nearly inert, without achievement, except for its part of the 2011 fiscal fiasco with Congress.
Once re-elected, feelings of mandate and confirmation were justified, although Mr. Obama ran more against Mr. Romney than for a specific program, except for raising taxes on those households earning more than $250,000. In the last two years, not even Ahab had it in for a whale as Mr. Obama has had it in for this group.
The Fiscal Cliff negotiations since the election are a mystery to me. The basic issues are a minor skirmish compared to the debt-limit fight two months ahead, and the inevitable big-money -- really big -- battle on Bowles-Simpson ground which will consume most of Mr. Obama's second term.
Why the total lock-up on the Cliff? What for? Polling places had barely closed before Republicans conceded on new revenue, and then their leadership re-conceded farther than the rank and file could stand. The concessions were met by White House demand for new revenue 3:1 in excess of spending cuts, while the Bowles-Simpson touchstone is 2:1 the other way, cuts over spending.
The only first-person accounts of negotiations inside the White House that I know of appeared in the WSJ on Saturday, December 15. In news pages, not Op-Ed, and based on notes taken by participants. This testimony describes Mr. Obama as tougher in private than in public, over the edge to insulting, goading Mr. Boehner into a walkout which he managed to resist. But, why? The President and most media have succeeded in demonizing Republicans, but to what purpose? They still hold a veto in the House.
Compromise does not mean that you get what you want. Ron Reagan cut deals with Tip O'Neill, but the price was larger government in each of his terms. Bill Clinton spoke his own frustration: the '93 fiscal deal meant he had to be an "Eisenhower Republican." Daddy Bush's fiscal deal was a great thing for the country, but cost him the job. Lyndon Johnson was not the king of bludgeoning Republicans, and Dixiecrats in his own party, but a magician of horse-trading.
In our government, compromise must begin with the President. The Republicans are of course at fault in their wishes for unaffordable spending on defense, and too-low taxes, but no compromise of the magnitude necessary now has ever come forth from Congress. Gravy did not flow from your turkey; it was the work of a skilled cook.
I wish not to say what I think I see: Mr. Obama intends to break the Republicans. Break their will now, so badly that Democrats will take the House in two years. The means: refuse resolution of the Fiscal Cliff and debt limit on terms Republicans can bear, and blame the Republicans for failure. And then Ahab will be free to pursue a tax-heavy defense of indefensible entitlements. I hope this conclusion is mistaken.
Sam Rayburn, master of the House, to fellow-Texan Lyndon Johnson upon his ascent to Senate Majority Leader: "Lyndon, don't tell anybody to go to hell unless you can make 'im go." How Mr. Obama manages to balance his frustration and righteousness with the need for compromise will tell the tale in 2013.
Friday, December 21, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 21st, 2012
In the absence of significant economic data or market movement, and in the presence of more economic and policy confusion than ever in my lifetime among civilians and professionals alike -- here an early jump on prospects for the new year.
All optimistic outlooks have housing as the primary ingredient, which is true as far as obvious thinking goes. We have all-time low rates and affordability, and the pig of distressed resales is departing the python in tidy bacon slices, not a mass, and slowly. However, in simple math, to get to a higher level of sales and prices will require growth in aggregate mortgage balances. Instead they are shrinking, the Fannie-Freddie conservator standing on that hose. And now the FHA faces an existential battle, to be punished for lending when no one else would, and suffering losses now.
When we see the mortgage supply rising, then housing will be able to lead. Until then we have a problem traditional at this season: Santa is stuck in the chimney.
Then we have the Fed's epic new promise to buy $1 trillion-worth of Treasurys and MBS next year. Some worry that a flood of cash will trigger inflation, or new bubble-buying of stocks, or pigs, or some other damned thing. However, in a recurrent theme looking forward, Fed cash cannot enter the real economy until the financial system uses it to make loans. Not. Until then the best the Fed can do is to hold down rates.
"Dear, did you say something?" No, but I thought I heard a funny noise over by the fireplace.
Another line of hope goes to the consumer. Indomitable. Resilient. Deleveraged. I would love to believe that, but the average household is still tapped out. Median income for a family of four has fallen 10% in the last five years. Too much net worth was lost in the housing fizzle, health insurance premiums and tuition have defied gravity, and so households desperately need increased income. But that increased income depends on a rising economy, which depends on the, ummm… consumer?
"Honey, it was so thoughtful of you to build a fire for us. The nice fireman at the door says that after they put it out we should have the chimney checked."
Europe announces to itself weekly that the worst is over. That its economy will begin to recover next year. That it is taking very meaningful steps toward unified action although these measures will require some additional negotiation, treaty re-ratification, and rather a lot of someone else's money. One year soon, the last resort:
"Draghi, vee hef nossing but chateau fumons. I tell you, vee cannot breathe! Make fire plus gros, plus vite!! Throw ECB kerosene!"
The Cliff, about which so many seem so preoccupied.... put it aside. On December 31 the Cliff will or won't, but this Cliff is just the first in a series ahead. Either Obama's soak-'em or Boehner's cut-'em at maximum would result in an annual deficit reduction of about $130 billion -- in an annual deficit of $1 trillion.
The weird part about the Cliff adjustments ahead is the disappearing money. Tax increases are routine, but usually result in increased spending. First have no doubt that these are tax increases, not merely ending a tax cut: the Bush brackets have been law longer than the Clinton ones were. Nor believe that the rich will pay "a little bit more," or will not feel the bite. $100 billion a year is real dough, as will be the next two similar hikes via tax reform. The bite is clear, but the odd part is hidden: new tax money will replace money presently being borrowed -- thus gone poof! by accounting austerity magic -- and spending will decline simultaneously in any semi-balanced deal.
"Darling, do you remember when you heard something by the fireplace last winter? I don't think the living room smells so good."
This family drama is perfectly human. We have never been in this situation before, and our puzzlement at what might be the matter, and what to do is appropriate. However, I do wish those in authority this holiday season would rent the movie Christmas Vacation, and study the scene in which Clark Griswold can't figure out why his lights won't come on and stay on. Some of this is hard, but some is not.
Friday, December 14, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 14th, 2012
Lot goin’ on. First the Fed, then the Cliff.
The Fed has embarked on QE4, or open-ended, or without end. Whatever. Next year the Fed will buy $1 trillion in Treasurys and MBS, and continue to buy until enough people are back at work, and stop short only if inflation becomes a problem. The buying is designed to keep long-term rates of all kinds low, and thereby revive the economy.
Naturally, rates rose since the announcement. Not a lot, the 10-year T-note above 1.70% from lows near 1.58%, and mortgages pushing 3.50%.
There is a logic to the rise. Several logics. First the crowd who from the onset of Fed efforts to save us in 2007 have been certain — certain — that inflation would follow, and been totally mistaken. Then the mob which believes QE opens the free-money door to “risk assets” — stocks, gold, and commodities. This time stocks fell, but more because of Cliff crumbling than loss of QE faith. Last a sensible group: if the Fed is trying this hard to revive the economy, it may work. All roads from that thought lead to the same place: for the moment, sell bonds, sell more than the Fed is buying. Thus rates rose.
The Fed’s focus is on unemployment, but I continue to believe that’s more statutory fig leaf than fact. The economy is in soggy shape, going nowhere, the rest of the world in worse shape, and austerity is coming here (see “Cliff” below).
The NFIB, surveyor of small-business conditions since 1971, found a substantial drop in its overall measure of confidence: down 5.6 points in the month to a low (87.5) exceeded on the downside only nine times in 41 years. Small-biz people are heavily Republican, maybe depressed at Romney’s loss, but the survey of small-biz earnings also plunged six points, sliding since April now to the worst since 2010. Same for sales.
Italy’s industrial production as of October has fallen 6.2% in one year; its youth joblessness now 36.5%, and its debt-to-GDP ratio rising faster than all estimates, 126% now, well over 130% next year. French auto sales tanked 19% last month — before austerity kicks in. Japan’s economy shrank 3.5% annualized in the 3rd quarter, contracting in five of the last eight quarters. China’s export decline gives the lie to all happy-talk, official and market-based.
I’m stickin’ to my Acme Parachute on the nearby Cliff: no way to know if or how it will be resolved, or consequences if not. I’m much more concerned about the case of Acme Dynamite that we are all standing on: the several years of tax increases and spending cuts ahead.
H. L. Mencken said that his job was to comfort the afflicted and afflict the comfortable. I try to chew equally on Right and Left in these pages. However, while confessing doubt about the difference between true negotiating positions and posturing, Mr. Obama right now is more out of bounds than the Republicans.
He did “win” in November, but this is not the Super Bowl. This is a deeply divided nation, and more confused than divided. He’s trying to roll the Republicans into a far worse deal than both sides could have had in 2011, all tax increase and no spending cut. And he still fails to explain to all the people what our true situation is — which he must do to get enough votes from his own party. Bowles-Simpson Truth: we must adopt cuts in future spending promises 3:1 tax increases. He looks like he’s making the same mistake as in his first term, trying to push the nation farther Left than it lives.
Marker. One of Mr. Obama’s demands: any budget deal must end the requirement to vote on increases in the national debt. I despise the posturing and wasted time around these votes, ever since 1980. However, the most precious parliamentary possession for a thousand years has been the power of the purse. Obama’s people counter: Well, we voted to spend the money — what’s the difference? Why should we have to go through these hostage-taking filibusters?
Every successful household knows the difference between a decision to spend and one to borrow. They are NOT the same. That’s exactly how we got in the soup we’re in. Spending is fun. You can borrow to keep at it until one day you’re bankrupt.
Lot goin’ on. First the Fed, then the Cliff.
The Fed has embarked on QE4, or open-ended, or without end. Whatever. Next year the Fed will buy $1 trillion in Treasurys and MBS, and continue to buy until enough people are back at work, and stop short only if inflation becomes a problem. The buying is designed to keep long-term rates of all kinds low, and thereby revive the economy.
Naturally, rates rose since the announcement. Not a lot, the 10-year T-note above 1.70% from lows near 1.58%, and mortgages pushing 3.50%.
There is a logic to the rise. Several logics. First the crowd who from the onset of Fed efforts to save us in 2007 have been certain — certain — that inflation would follow, and been totally mistaken. Then the mob which believes QE opens the free-money door to “risk assets” — stocks, gold, and commodities. This time stocks fell, but more because of Cliff crumbling than loss of QE faith. Last a sensible group: if the Fed is trying this hard to revive the economy, it may work. All roads from that thought lead to the same place: for the moment, sell bonds, sell more than the Fed is buying. Thus rates rose.
The Fed’s focus is on unemployment, but I continue to believe that’s more statutory fig leaf than fact. The economy is in soggy shape, going nowhere, the rest of the world in worse shape, and austerity is coming here (see “Cliff” below).
The NFIB, surveyor of small-business conditions since 1971, found a substantial drop in its overall measure of confidence: down 5.6 points in the month to a low (87.5) exceeded on the downside only nine times in 41 years. Small-biz people are heavily Republican, maybe depressed at Romney’s loss, but the survey of small-biz earnings also plunged six points, sliding since April now to the worst since 2010. Same for sales.
Italy’s industrial production as of October has fallen 6.2% in one year; its youth joblessness now 36.5%, and its debt-to-GDP ratio rising faster than all estimates, 126% now, well over 130% next year. French auto sales tanked 19% last month — before austerity kicks in. Japan’s economy shrank 3.5% annualized in the 3rd quarter, contracting in five of the last eight quarters. China’s export decline gives the lie to all happy-talk, official and market-based.
I’m stickin’ to my Acme Parachute on the nearby Cliff: no way to know if or how it will be resolved, or consequences if not. I’m much more concerned about the case of Acme Dynamite that we are all standing on: the several years of tax increases and spending cuts ahead.
H. L. Mencken said that his job was to comfort the afflicted and afflict the comfortable. I try to chew equally on Right and Left in these pages. However, while confessing doubt about the difference between true negotiating positions and posturing, Mr. Obama right now is more out of bounds than the Republicans.
He did “win” in November, but this is not the Super Bowl. This is a deeply divided nation, and more confused than divided. He’s trying to roll the Republicans into a far worse deal than both sides could have had in 2011, all tax increase and no spending cut. And he still fails to explain to all the people what our true situation is — which he must do to get enough votes from his own party. Bowles-Simpson Truth: we must adopt cuts in future spending promises 3:1 tax increases. He looks like he’s making the same mistake as in his first term, trying to push the nation farther Left than it lives.
Marker. One of Mr. Obama’s demands: any budget deal must end the requirement to vote on increases in the national debt. I despise the posturing and wasted time around these votes, ever since 1980. However, the most precious parliamentary possession for a thousand years has been the power of the purse. Obama’s people counter: Well, we voted to spend the money — what’s the difference? Why should we have to go through these hostage-taking filibusters?
Every successful household knows the difference between a decision to spend and one to borrow. They are NOT the same. That’s exactly how we got in the soup we’re in. Spending is fun. You can borrow to keep at it until one day you’re bankrupt.
Friday, December 7, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 7th, 2012
Markets are very quiet despite the usual first-week-of-month flood of new data. In the last week the 10-year T-note has not traded above 1.63% nor below 1.58%, and mortgages are holding just below 3.50% depending on borrower and property.
The November payroll survey estimate arrived with a 146,000-job gain, better than forecast but garbled by Sandy — and we cannot know whether up or down. The unemployment rate fell to 7.7%, but may have been more distorted by Sandy than payrolls: the percent of unemployed fell because the surveyed workforce shrank.
“I’m calling from the Bureau of Labor Statistics. If you are not at work, do you still have a job but just can’t get to it? Have you quit looking for work because you’re demoralized, or because a tree fell on your car? Hello? Hello? You’re too cold to talk? You don’t seem to understand how important this call is to the nation. Hello? Is your phone out? Yes, I know that if it were we wouldn’t be talking. No need to be insulting.”
The Institute of Supply Management (“Purchasing Managers” in old days) takes two surveys at the end of each month. The manufacturing one for November dumped two points from October to 49.5, the worst since 2009. The second one, for the service sector, rose to 54.7 from 52.3 in October. Tend to trust the manufacturing number: it has longer history, four decades versus one.
This morning the University of Michigan released its consumer confidence survey for December. It had been on a rising trend since late summer, up to 82.7 last month and was expected to stay there or higher, and instead tanked to 74.5. Economy rolling over? Republicans who just discovered who won in November? Nobody knows.
Intermission for Fiscal Cliff. The election has brought order to Republicans, most of whom understand they could have had a better deal in 2011. Speaker Boehner fired two unruly Tea Pots from their committee posts, and Senator Jim DeMint resigned altogether, headed for the Heritage Foundation, where he can screech in its phone booth undisturbed. Mr. Obama has less feel for his tax base and the economy than Mitt Romney for the people, but this time might not overreach his way out of a deal in plain sight. I think chances have reversed two bad weeks and improved now.
Back to reality. Each quarter the Fed releases Z-1, describing the movement and landing place of every buck in the financial system. Some new numbers are striking.
The net worth of US households in the last 90 days rose by $1.7 trillion. Feel that?
Didn’t think so. A mere wobble in a base of $64 trillion. Which by the way is not a shabby net worth. Over the last year the wobbles have combined for genuine progress, a gain of $4.5 trillion. The Fed estimates recovery of $1 trillion of the $7 trillion in home equity lost since 2006, a long way to go but moving. The other $3.5 trillion gained is in financial assets, most buried out of sight in pension funds, insurance company reserves, and retirement accounts, slow and quiet, but real.
Included in Z-1 are mortgage accounts. Yesterday’s release shows a pickup in post-Bubble plodding in some places, but a total stall in another. The overall figure contains both the good and the troublesome news: aggregate US residential mortgages have fallen by $88 billion in 90 days, $289 billion in the last year, and are now below $10 trillion for the first time since 2005 (from the $11.2 trillion peak in 2007).
Some of the overall decline is from overdue write-offs. Loans also disappear via sales and refis, but there is little of that in the worst stuff. The trash in private-label MBS is down to $936 billion from $2.2 trillion in 2007. Home equity loans (including seconds) from a same-year peak at $1.13 trillion have fallen to $790 billion.
The bad news: without added mortgage supply, a genuine housing recovery lives only in the minds of the pollyannas. The nation’s sole new supply, Fannie-Freddie-FHA-VA, has been the same since 2009, about $5.8 trillion. All other sources, the “private” dreamland of government-haters, are just as inert as they have been since 2007.
When these mortgage aggregates begin to rise, then we’ll know that housing really is healing, and the economy with it.
Markets are very quiet despite the usual first-week-of-month flood of new data. In the last week the 10-year T-note has not traded above 1.63% nor below 1.58%, and mortgages are holding just below 3.50% depending on borrower and property.
The November payroll survey estimate arrived with a 146,000-job gain, better than forecast but garbled by Sandy — and we cannot know whether up or down. The unemployment rate fell to 7.7%, but may have been more distorted by Sandy than payrolls: the percent of unemployed fell because the surveyed workforce shrank.
“I’m calling from the Bureau of Labor Statistics. If you are not at work, do you still have a job but just can’t get to it? Have you quit looking for work because you’re demoralized, or because a tree fell on your car? Hello? Hello? You’re too cold to talk? You don’t seem to understand how important this call is to the nation. Hello? Is your phone out? Yes, I know that if it were we wouldn’t be talking. No need to be insulting.”
The Institute of Supply Management (“Purchasing Managers” in old days) takes two surveys at the end of each month. The manufacturing one for November dumped two points from October to 49.5, the worst since 2009. The second one, for the service sector, rose to 54.7 from 52.3 in October. Tend to trust the manufacturing number: it has longer history, four decades versus one.
This morning the University of Michigan released its consumer confidence survey for December. It had been on a rising trend since late summer, up to 82.7 last month and was expected to stay there or higher, and instead tanked to 74.5. Economy rolling over? Republicans who just discovered who won in November? Nobody knows.
Intermission for Fiscal Cliff. The election has brought order to Republicans, most of whom understand they could have had a better deal in 2011. Speaker Boehner fired two unruly Tea Pots from their committee posts, and Senator Jim DeMint resigned altogether, headed for the Heritage Foundation, where he can screech in its phone booth undisturbed. Mr. Obama has less feel for his tax base and the economy than Mitt Romney for the people, but this time might not overreach his way out of a deal in plain sight. I think chances have reversed two bad weeks and improved now.
Back to reality. Each quarter the Fed releases Z-1, describing the movement and landing place of every buck in the financial system. Some new numbers are striking.
The net worth of US households in the last 90 days rose by $1.7 trillion. Feel that?
Didn’t think so. A mere wobble in a base of $64 trillion. Which by the way is not a shabby net worth. Over the last year the wobbles have combined for genuine progress, a gain of $4.5 trillion. The Fed estimates recovery of $1 trillion of the $7 trillion in home equity lost since 2006, a long way to go but moving. The other $3.5 trillion gained is in financial assets, most buried out of sight in pension funds, insurance company reserves, and retirement accounts, slow and quiet, but real.
Included in Z-1 are mortgage accounts. Yesterday’s release shows a pickup in post-Bubble plodding in some places, but a total stall in another. The overall figure contains both the good and the troublesome news: aggregate US residential mortgages have fallen by $88 billion in 90 days, $289 billion in the last year, and are now below $10 trillion for the first time since 2005 (from the $11.2 trillion peak in 2007).
Some of the overall decline is from overdue write-offs. Loans also disappear via sales and refis, but there is little of that in the worst stuff. The trash in private-label MBS is down to $936 billion from $2.2 trillion in 2007. Home equity loans (including seconds) from a same-year peak at $1.13 trillion have fallen to $790 billion.
The bad news: without added mortgage supply, a genuine housing recovery lives only in the minds of the pollyannas. The nation’s sole new supply, Fannie-Freddie-FHA-VA, has been the same since 2009, about $5.8 trillion. All other sources, the “private” dreamland of government-haters, are just as inert as they have been since 2007.
When these mortgage aggregates begin to rise, then we’ll know that housing really is healing, and the economy with it.
Friday, November 30, 2012
Capital Markets Update
By Louis S. Barnes Friday, November 30th, 2012
Global markets have synchronized their trading on the Fiscal Cliff and little else. A positive public statement by anybody, then immediately stocks run up and bonds sell off. A negative slant to an eyebrow, a down-turned lip, no matter how minor the official… stocks tank, buy bonds, rates down.
This preoccupation has some merit, but only half. If no deal, and over the cliff we go, Wile E. Coyote in an Acme parachute with no ripcord, the landing will be unpleasant. On the other hand, exuberance at a deal will be fleeting, replaced by awareness that the deal, any deal, will be the beginning of the largest round of tax increases and spending cuts in US history. Just as Mr. Coyote thinks he’s caught the Roadrunner, an Acme safe lands on him. Beep-beep.
It is nigh impossible to separate posturing public comments on the Cliff from serious ones. Each of the negotiating sides must try to sell its ideas to the general public, but also try to reassure is own constituents that it is being tough, giving nothing away. Last week the Republicans genuinely conceded the need for new revenue (losing an election will do that); but this week’s White House counter beats all for chutzpah. Why not just go ahead with tax increases right now, $1.6 trillion over ten years, and talk about spending cuts some other year? And give the White House authority to borrow whatever it wants, whenever, no more of those silly debt-limit votes in Congress? Oh, and we’d like another $50 billion in stimulus spending right now.
Just posturing, I assume. Be able to tell the Democratic base, “we tried.” I hope.
The economy is always hard to figure, but exceptionally so now for three reasons. First the Acme Cliff, above. Second, any negative in economic data gets a “Sandy” response. And third, every salesman who would like you to make an optimistic stock market trade says that housing is about to boom.
October personal income arrived unchanged versus an expected .2% gain. Sandy. October personal spending declined .2% versus an expected .1% gain. Sandy. The Chicago Fed’s National Activity index added a deeper negative in October to a slide that began last spring. Sandy. 3rd quarter GDP was revised happily from a 2.0% annualized gain to 2.7%. Unhappily, most of the gain was from bloating un-sold inventories, and consumer spending was revised down to 1.4%. Sandy.
Wait a minute… Sandy landed in the 4th quarter. Don’t bother me, I’m busy selling.
Housing. No question, housing is better. The avalanche of distressed inventory headed to fire sale is instead slumping and dribbling along. Prices are rising, especially in the disastrous spots in CA, NV, and AZ, although from extremely low levels. Even in places where prices are not rising, some liquidity has been restored: some owners can sell homes in reasonable time frames and without ruinous concessions.
However, is housing the new economic “driver,” as claimed in so many new media stories?
The New York Fed began to run two years ago a quarterly analysis of household debt. Some will be pleased to know that total consumer indebtedness fell $74 billion in the 3rd quarter to $11.31 trillion. Mortgages of all kinds are 76% of the NYFed total, and they kerplunked $120 billion in 90 days, a 5.6% annual rate of decline.
Two questions: how are you going to get housing oomph with net mortgage issuance in its own Acme act? Cash buyers? Lemme know when you see a mob like that. Distressed-market cash cripple-shooters are in play, but not replacing a half-trillion-dollar annual shrinkage in credit.
Then, how come total consumer debt fell less than the mortgage portion fell? A lot less? The ugly little secret: a 90-day $42 billion-dollar add to student loans. Total now: $942 billion. Plus $100 billion in one year, doubled since 2008. A lot of home equity lost, no significant gain now, can’t refinance to send Egbert to the U. Tuition is way up because state budgets go to health care, not the U. Thus student loans explode.
Hell of a way to run a railroad.
Friday, November 16, 2012
Capital Markets Update
By Louis S. Barnes Friday, November 16, 2012
Most people seem to feel some sense of relief at the passing of the election, but markets are apprehensive. We need for big stuff to happen, and know that more will happen faster than in years, but we don't know what or to what effect.
The daily flow of economic data causes upsets, but reassures markets -- at least we know where we are. For the next month hurricane Sandy will distort to uselessness most of the usual reports, as it did this week's shaky ones for retail sales, unemployment, and industrial production. Maybe a new trend, maybe nothing.
Sandy had nothing to do with the rest of the world. Euro-zone industrial production in September fell sharply, down 2.5% in the month. 3rd quarter euro-zone GDP fell .2% annualized, negative for the second-straight quarter and three of the last four. Japan's 3Q GDP sank 3.5%. China's official reports cannot be trusted, not during a leadership change; and nobody outside the new Politburo Standing Committee knows what the change means -- and maybe not even those seven men.
Against that backdrop the US has embarked on the most profound change in its finances since the income tax began in 1862. The stock market had a bad day after Mr. Obama's victory, but the cause appeared to be Europe; the straight-down stocks since then seem anticipation of his newly announced tax-negotiating position.
"The wealthy don't need a tax cut." Fair enough. However, the reversal of a tax cut 11 years ago will today be a tax increase in every way and effect. But, since the President's proposal affects only the top 2% of income earners, it's a painless way to raise money. So those in favor say. Over ten years, the top bracket increase from 33%-35% to 39.6% will raise $441 billion. Limiting deductions by these taxpayers, another $123 billion. Another $206 billion from new taxes on dividends plus an inevitable increase in capital gains taxes… the link to sinking stocks is unmistakable.
The very worst of the lies today about taxation: "We have had higher brackets for the rich and not hurt the economy." We have had higher brackets, but nobody paid them in previous systems that were more loophole than collection. Pulling $800+ billion out of the pockets of 2% of taxpayers will have negative economic effect.
Some spending cuts will come soon, but very few. There will be no cuts in current social spending (ObamaCare will add), instead reductions in future promises late in the decade. The frontloading of taxes and backloading of spending cuts makes Republican negotiators nervous. And should, based on the history.
The great tax reform of 1986 removed many prior loopholes and reduced brackets to two: 15% and 28%. By 1990 that reform did not generate enough revenue to fund social spending above forecast. We raised brackets, closed loopholes. In 1993 Mr. Clinton reached a grand deal: the top bracket to 39.6% in exchange for hard limits on spending -- that, a technology-booming economy, and a stock bobble created a budget surplus. Clinton's deal was fair and effective, but we know now that economy was not authentic, and we will re-apply those brackets now to a far weaker economy.
The most extraordinary change coming: for the first time since 1862: a no-loophole system. Thus at any given bracket, the effective rate of tax will be higher than ever.
Some think a Cliff deal will reassure business and help the economy. More likely: everyone affected will know that austerity has arrived on our shore, and our hopes will rest on a far more adaptable economy than anywhere else. Good bet, too.
Good news for a deal: two hardheads who undermined at a distance John Boehner's efforts in 2011, Paul Ryan and Eric Cantor, will now join the negotiating team. On the other side, all will depend on the extent of Mr. Obama's determination for righteous extraction of cash from people who neither need it nor earned it.
Temporary bad news today on another front: the bankruptcy of the maker of Twinkies and Wonder Bread. (In my childhood my mother said they called it that because we wonder if it's bread.) Take heart: the brands will be sold and revived. Couldn't make it through a time like this without an occasional smuggled Twinkie.
Friday, November 9, 2012
Capital Markets Update
By Louis S. Barnes Friday, November 9th, 2012
Now, that’s over. Two years of standing around, now down to business. Fast. Republicans hold the same veto in the House of Representatives, but have already softened their 2011 gridlock position. Tom Cole, Republican of Oklahoma and Deputy Whip, yesterday: “Of course we need more revenue.”
The President is the same, but he will have less power every day. Congresspersons of both parties know that they’ll be around long after he’s gone, holding the bag for whatever he wants to do.
One piece at a time, stocks first. The sell-off has not been a repudiation of Obama’s re-election. It began in Europe and Asia, issues deepening there, not improving. Some certainly sold stocks in fear of higher taxes on capital gains (an extra 3.8% right now, including sellers of homes, courtesy of ObamaCare), and they are right, but that’s not nearly as important as weakening global trade undercutting corporate earnings.
Obama’s re-election has already had one strong benefit to business: Perfesser Bernanke now has a free hand, and his replacement to be nominated next fall will be of the same mind. It is not an accident that long-term interest rates have fallen since Tuesday night. Among many suicidal impulses afflicting Republicans has been hostility to the Fed, and we’re done with that foolishness.
Housing will benefit also. Had Romney been elected, Republicans’ compulsive hatred of Fannie and Freddie would likely have resulted in premature efforts to shut them down before any private market for mortgages had been revived. There is no telling what clamp Republicans would have put on the FHA in exchange for the bailout that it needs for no fault of its own; now it will get what it needs — and the nation needs.
If we get a little lucky, the Obamanaughts may be able to recalibrate or remove the iron-headed Edward DeMarco, regulator of Fannie and Freddie, responsible for over-tightened credit standards and the plague of forced buybacks of loans which has paralyzed lending.
Then the Fiscal Cliff. We ain’t going over, but no Grand Bargain, neither. Not soon anyway. Given the nature of our political system, expect something incremental and protracted. Perhaps by December an exchange of concessions buying more time. And again and again. Any grand bargain is going to involve a re-write of the tax code, an that will take all of next year.
What is the chance that negotiations break down as they did in 2011? And we careen into another debt-limit crisis?
The President’s Fiscal Commission (google that!), aka Bowles-Simpson laid out the whole thing. The Commission articulated two key principles: we must agree on the size of government expressed as a percent of GDP, and then fund it; and second, a flatter tax code with lower tax rates but free of goodies and exceptions is better for economic growth than a steeper code with higher rates of taxation.
Incredibly, in the two years since the Commission, largely because leading Republicans rejected its findings, President Obama has never explained why he rejected them also. Everything he has said since indicates opposition to the Commission’s two key principles: he does not want a limit to size, and he wants a steep code.
Worse, his tactics will tend to frustrate a deal. This morning Mr. Obama invited Congressional leaders to the White House, expressed his wish for them to reach a “balanced” deal, and refused to say what that might be.
Everyone knows that he who speaks first loses in negotiation. However, expecting a college class to reach a bargain subject to the final approval of the professor, the professor to remain disengaged… that is exactly the 2011 pattern that Boehner referred to as “negotiating with a bowl of Jell-O.”
If you want to be President, be President. That’s what this deal hangs on.
And as we used to say, but have forgotten how, be President not just of the 60 million who voted for you, but also the 57 million who voted for the other guy.
Now, that’s over. Two years of standing around, now down to business. Fast. Republicans hold the same veto in the House of Representatives, but have already softened their 2011 gridlock position. Tom Cole, Republican of Oklahoma and Deputy Whip, yesterday: “Of course we need more revenue.”
The President is the same, but he will have less power every day. Congresspersons of both parties know that they’ll be around long after he’s gone, holding the bag for whatever he wants to do.
One piece at a time, stocks first. The sell-off has not been a repudiation of Obama’s re-election. It began in Europe and Asia, issues deepening there, not improving. Some certainly sold stocks in fear of higher taxes on capital gains (an extra 3.8% right now, including sellers of homes, courtesy of ObamaCare), and they are right, but that’s not nearly as important as weakening global trade undercutting corporate earnings.
Obama’s re-election has already had one strong benefit to business: Perfesser Bernanke now has a free hand, and his replacement to be nominated next fall will be of the same mind. It is not an accident that long-term interest rates have fallen since Tuesday night. Among many suicidal impulses afflicting Republicans has been hostility to the Fed, and we’re done with that foolishness.
Housing will benefit also. Had Romney been elected, Republicans’ compulsive hatred of Fannie and Freddie would likely have resulted in premature efforts to shut them down before any private market for mortgages had been revived. There is no telling what clamp Republicans would have put on the FHA in exchange for the bailout that it needs for no fault of its own; now it will get what it needs — and the nation needs.
If we get a little lucky, the Obamanaughts may be able to recalibrate or remove the iron-headed Edward DeMarco, regulator of Fannie and Freddie, responsible for over-tightened credit standards and the plague of forced buybacks of loans which has paralyzed lending.
Then the Fiscal Cliff. We ain’t going over, but no Grand Bargain, neither. Not soon anyway. Given the nature of our political system, expect something incremental and protracted. Perhaps by December an exchange of concessions buying more time. And again and again. Any grand bargain is going to involve a re-write of the tax code, an that will take all of next year.
What is the chance that negotiations break down as they did in 2011? And we careen into another debt-limit crisis?
The President’s Fiscal Commission (google that!), aka Bowles-Simpson laid out the whole thing. The Commission articulated two key principles: we must agree on the size of government expressed as a percent of GDP, and then fund it; and second, a flatter tax code with lower tax rates but free of goodies and exceptions is better for economic growth than a steeper code with higher rates of taxation.
Incredibly, in the two years since the Commission, largely because leading Republicans rejected its findings, President Obama has never explained why he rejected them also. Everything he has said since indicates opposition to the Commission’s two key principles: he does not want a limit to size, and he wants a steep code.
Worse, his tactics will tend to frustrate a deal. This morning Mr. Obama invited Congressional leaders to the White House, expressed his wish for them to reach a “balanced” deal, and refused to say what that might be.
Everyone knows that he who speaks first loses in negotiation. However, expecting a college class to reach a bargain subject to the final approval of the professor, the professor to remain disengaged… that is exactly the 2011 pattern that Boehner referred to as “negotiating with a bowl of Jell-O.”
If you want to be President, be President. That’s what this deal hangs on.
And as we used to say, but have forgotten how, be President not just of the 60 million who voted for you, but also the 57 million who voted for the other guy.
Friday, November 2, 2012
Capital Markets Update
By Louis S. Barnes Friday, November 2nd, 2012
The last economic data to be released before the election has given no advantage to either candidate. We did pick up 171,000 jobs in October, a little better than forecast, and revised up another 84,000 in prior months.
However, the average workweek was unchanged for the fourth month in a row, and hourly earnings fell slightly, over the last year rising only 1.6%. “U-6″, the measure of unemployment including “involuntary part-time,” is still 14.6%. On net a brighter sign than the jobs report: the ISM survey of manufacturing in October crawled 0.2 further into positive ground at 51.7.
Markets are flat, I think suppressed more by the election than anything, although stocks are clearly hurt by diminished earnings. Foreign action has also been muted and deferred by our election, especially in Europe.
So, Wednesday morning, assuming we’ll know by then, how will events and markets break from months of unnatural quiet?
1. We’ll know by then. The 2000 election was a coin toss like this one, but the damned thing won’t land on its edge again… not twice in four tries.
2. Who? Obama has an Electoral College edge, but that edge has narrowed steadily. Iffy polling results this year seem to make queasy the pollsters themsleves. This one may more resemble ’48 and the Chicago Tribune’s “Dewey Beats Truman!” — but either man could be Truman in ’12.
3. With no forecast to work with, markets can’t discount either outcome. Wednesday could be an explosive trading day, but maybe not. If it’s Obama, things are going to happen fast; if it’s Romney, no matter what he says after winning, he still won’t be in office for almost three months.
4. Fiscal Cliff. If it’s Romney, then Obama and Congress will punt 90 days. If it’s Obama, markets will begin to trade rapidly on prospects for a deal. If Obama sticks with his ethereal hope that “Congress will reach a compromise” — if you hear those words again, find something big and solid to hide under. In our government, intentionally designed not to do things and to do nothing at all in a hurry, either the President leads, putting his reputation on the line and giving cover to legislators of his own party, or nothing of substance ever happens.
If we seem in for a replay of 2011, markets aren’t going to like it. If we get a deal, and a real one, markets will like it no matter how tilted Left or Right.
5. No matter who gets elected, Tim Geithner will be gone from Treasury. He has wanted to leave for a year, and the White House has not explained why it begged him to stay. Anybody can do nothing. It’s been a challenge to annoy Right, Left, and Business Center, but the Prince of Procrastination has been up to it. No matter who replaces the Wizard of Waiting, whoever it is cannot do less.
6. Any pop the economy gets from an Obama resolution of the Fiscal Cliff will be smothered in its crib by runaway regulation. Romney might overdo regulation relief, but it would take many years to do harm: really bad financial actors and practices are long gone. Even Vikram Pandit is gone. The link from regulation to the economy is finance. Somebody is going to have to decide, quickly, whether we want Dodd-Frank and Basel III risk-based bank capital rules, or want loans. A or B.
7. Housing. Finance is everything, and the most damaged by the Regulation Bubble. Edward J. DeMarco, Czar of Fannie and Freddie, must be either removed or recalibrated. There will come a day to privatize these two, but squeezing the life out of them before a private supply exists makes a broad housing recovery impossible. Oh-by-the-way, the FHA needs a $50-$100 billion bailout.
Housing’s benefit from the election? I don’t see any. Obama’s record is clear: nothing. However, Romney is fond of the privatizing nincompoops. Worse than nothing.
8. The new guy will nominate the next Fed Chairman. There are many able candidates, but this is a tough stream in which to change horses.
The last economic data to be released before the election has given no advantage to either candidate. We did pick up 171,000 jobs in October, a little better than forecast, and revised up another 84,000 in prior months.
However, the average workweek was unchanged for the fourth month in a row, and hourly earnings fell slightly, over the last year rising only 1.6%. “U-6″, the measure of unemployment including “involuntary part-time,” is still 14.6%. On net a brighter sign than the jobs report: the ISM survey of manufacturing in October crawled 0.2 further into positive ground at 51.7.
Markets are flat, I think suppressed more by the election than anything, although stocks are clearly hurt by diminished earnings. Foreign action has also been muted and deferred by our election, especially in Europe.
So, Wednesday morning, assuming we’ll know by then, how will events and markets break from months of unnatural quiet?
1. We’ll know by then. The 2000 election was a coin toss like this one, but the damned thing won’t land on its edge again… not twice in four tries.
2. Who? Obama has an Electoral College edge, but that edge has narrowed steadily. Iffy polling results this year seem to make queasy the pollsters themsleves. This one may more resemble ’48 and the Chicago Tribune’s “Dewey Beats Truman!” — but either man could be Truman in ’12.
3. With no forecast to work with, markets can’t discount either outcome. Wednesday could be an explosive trading day, but maybe not. If it’s Obama, things are going to happen fast; if it’s Romney, no matter what he says after winning, he still won’t be in office for almost three months.
4. Fiscal Cliff. If it’s Romney, then Obama and Congress will punt 90 days. If it’s Obama, markets will begin to trade rapidly on prospects for a deal. If Obama sticks with his ethereal hope that “Congress will reach a compromise” — if you hear those words again, find something big and solid to hide under. In our government, intentionally designed not to do things and to do nothing at all in a hurry, either the President leads, putting his reputation on the line and giving cover to legislators of his own party, or nothing of substance ever happens.
If we seem in for a replay of 2011, markets aren’t going to like it. If we get a deal, and a real one, markets will like it no matter how tilted Left or Right.
5. No matter who gets elected, Tim Geithner will be gone from Treasury. He has wanted to leave for a year, and the White House has not explained why it begged him to stay. Anybody can do nothing. It’s been a challenge to annoy Right, Left, and Business Center, but the Prince of Procrastination has been up to it. No matter who replaces the Wizard of Waiting, whoever it is cannot do less.
6. Any pop the economy gets from an Obama resolution of the Fiscal Cliff will be smothered in its crib by runaway regulation. Romney might overdo regulation relief, but it would take many years to do harm: really bad financial actors and practices are long gone. Even Vikram Pandit is gone. The link from regulation to the economy is finance. Somebody is going to have to decide, quickly, whether we want Dodd-Frank and Basel III risk-based bank capital rules, or want loans. A or B.
7. Housing. Finance is everything, and the most damaged by the Regulation Bubble. Edward J. DeMarco, Czar of Fannie and Freddie, must be either removed or recalibrated. There will come a day to privatize these two, but squeezing the life out of them before a private supply exists makes a broad housing recovery impossible. Oh-by-the-way, the FHA needs a $50-$100 billion bailout.
Housing’s benefit from the election? I don’t see any. Obama’s record is clear: nothing. However, Romney is fond of the privatizing nincompoops. Worse than nothing.
8. The new guy will nominate the next Fed Chairman. There are many able candidates, but this is a tough stream in which to change horses.
Friday, October 26, 2012
Capital Markets Update
By Louis S. Barnes Friday, October 26th, 2012
Markets seem at last to have noticed the possible range of consequences from the election 10 days hence, and the result is a wide-eyed, jaw-dropped, don’t-do-anything.
Absent constant paddling, stocks tend to sink, and that’s what they’ve done between frozen days. Bonds tend to glaciate altogether. The 10-year T-note still cannot break 1.85% going upward, and its trading range since August has narrowed bottom-up: from all-time low 1.40% in July to 1.55% in September, now can’t fall below 1.70%. Mortgages are motionless just below 3.50%.
Stocks also suffer from poor prospects for earnings. What a surprise. By some estimates nearly two- thirds of S&P500 earnings in the last half-dozen years have come from overseas, rising with global trade volume. As that volume now has flattened (at best), so have earnings. It is fair to say that the US is in better shape than elsewhere, but not enough so to propel earnings.
Third-quarter GDP arrived at 2.0% annual, imperceptibly above the 1.8% forecast. The Chicago Fed’s National Activity Index in September rose to exactly 0.00 (three-month average -.37), as dead flat and flat gets. Housing is improving, but the change is far oversold in financial media. September sales of new homes were up 27% year-over-year from a very low base, yet NAR reported no change in pending contract volume for September. One of the very best overall housing measures is mortgage-insurer MGIC’s quarterly Market Trend Analysis, third quarter figures just released. Reporting on 73 metro markets, measured strong-stable- soft-weak, it found 14 “improving” versus only one “softening,” the best ratio since 2005. However, not one was rated “strong.” 28 were found to be stable, and the remaining 45 either soft or weak.
Disinterest in the election until the first debate was a good idea. Government in the last two years has been too painful to watch, and the two-year parade of Republican candidates drove away crowds. In the old days of Party control, Gingrich, Paul, and Bachmann would not have been allowed near a podium; and the others looked like a country club board of directors assembled to vote women off the golf course.
Now, the race too tight to call, markets must consider either outcome. A Romney White House might bring energetic action, economic understanding not seen since Clinton, and regulatory relief, but it’s impossible to know how much a desire for small government and free markets might be overdone.
Markets have also discovered that next year is probably Perfesser Bernanke’s last. There are able, mainstream replacements in either party, but for all the carping about Bernanke he has done better than anyone in government. Heroes are not easily replaced. Yet another discovery: although all assume some deferral of the Fiscal Cliff past January, a fiscal contraction is coming, no matter what or who.
An Obama re-election is especially murky because he’ll have the same Congress he’s been unable to work with for the last two years. And in that unchanged Congress lies perhaps the only unexamined issue in this election, heavily distorted by the Left side of the media. Who are we, as an electorate?
The longest and widest plank in the Democratic platform is the pitch that Republicans are the party of the One-Percenters. Billionaires. No economic agenda except to protect their goodies. And an American Taliban social agenda. Latter-day Scrooges and bad-hearted preachers.
One would think Republicans like this would be a minority.
Ahem. The House of Representatives has 435 seats. Districts are reallocated among states based on population changes, and the shapes and political contents of each district are determined by state governments, those decisions supervised by the courts. We do rig and gerrymander, but have been in serious pursuit of “one man, one vote” for 50 years. The House now has 240 Republicans, 190 Democrats, and 5 vacancies. That huge Republican majority arrived in 2010, the 63-seat net gain by Republicans the largest in any election since 1938. The most surprising thing to me in the 2012 election forecasts: no poll expects the Democrats to recapture more than 10 seats, and most think 5.
Deeper into grass roots… Bloomberg reported this week that both houses of 15 state legislatures are controlled by Democrats. 26 by Republicans.
If you’re reading this you’re a policy junkie of some sort. The best visual of our electoral divide is CNN’s John King and his magic map, county-by-county, Red or Blue or undecided grey. On every one of King’s maps, Blue America is an urban archipelago floating in a Red rural sea, suburban beachheads decisive.
I met a certified Lefty here, a program director for a civic group, professionally a therapist, both of us arriving too early for the show. I asked her views, saying no argument intended, just curious. She described fear among her circle, clients and friends; fear that the helping hand of government would be withdrawn from those with no other recourse. She said that was her main motivation to vote with Democrats, and laughed as she said the rest of her family were not so damned pleased by her leanings.
Where are they? Small town on the prairie 150 miles east. And how are they, and what are they thinking? They are afraid. Of? They get up early, they work killing hours, they look after each other, their neighborhoods and churches, and they’re afraid that the government people will bury them with rules and take more of what little they have, and then there won’t be anyone to help.
Buy any election theory that you like, except this one: good guys versus bad guys. We are far more alike in the most important ways than different. And we are all struggling to figure what we should do together.
Markets seem at last to have noticed the possible range of consequences from the election 10 days hence, and the result is a wide-eyed, jaw-dropped, don’t-do-anything.
Absent constant paddling, stocks tend to sink, and that’s what they’ve done between frozen days. Bonds tend to glaciate altogether. The 10-year T-note still cannot break 1.85% going upward, and its trading range since August has narrowed bottom-up: from all-time low 1.40% in July to 1.55% in September, now can’t fall below 1.70%. Mortgages are motionless just below 3.50%.
Stocks also suffer from poor prospects for earnings. What a surprise. By some estimates nearly two- thirds of S&P500 earnings in the last half-dozen years have come from overseas, rising with global trade volume. As that volume now has flattened (at best), so have earnings. It is fair to say that the US is in better shape than elsewhere, but not enough so to propel earnings.
Third-quarter GDP arrived at 2.0% annual, imperceptibly above the 1.8% forecast. The Chicago Fed’s National Activity Index in September rose to exactly 0.00 (three-month average -.37), as dead flat and flat gets. Housing is improving, but the change is far oversold in financial media. September sales of new homes were up 27% year-over-year from a very low base, yet NAR reported no change in pending contract volume for September. One of the very best overall housing measures is mortgage-insurer MGIC’s quarterly Market Trend Analysis, third quarter figures just released. Reporting on 73 metro markets, measured strong-stable- soft-weak, it found 14 “improving” versus only one “softening,” the best ratio since 2005. However, not one was rated “strong.” 28 were found to be stable, and the remaining 45 either soft or weak.
Disinterest in the election until the first debate was a good idea. Government in the last two years has been too painful to watch, and the two-year parade of Republican candidates drove away crowds. In the old days of Party control, Gingrich, Paul, and Bachmann would not have been allowed near a podium; and the others looked like a country club board of directors assembled to vote women off the golf course.
Now, the race too tight to call, markets must consider either outcome. A Romney White House might bring energetic action, economic understanding not seen since Clinton, and regulatory relief, but it’s impossible to know how much a desire for small government and free markets might be overdone.
Markets have also discovered that next year is probably Perfesser Bernanke’s last. There are able, mainstream replacements in either party, but for all the carping about Bernanke he has done better than anyone in government. Heroes are not easily replaced. Yet another discovery: although all assume some deferral of the Fiscal Cliff past January, a fiscal contraction is coming, no matter what or who.
An Obama re-election is especially murky because he’ll have the same Congress he’s been unable to work with for the last two years. And in that unchanged Congress lies perhaps the only unexamined issue in this election, heavily distorted by the Left side of the media. Who are we, as an electorate?
The longest and widest plank in the Democratic platform is the pitch that Republicans are the party of the One-Percenters. Billionaires. No economic agenda except to protect their goodies. And an American Taliban social agenda. Latter-day Scrooges and bad-hearted preachers.
One would think Republicans like this would be a minority.
Ahem. The House of Representatives has 435 seats. Districts are reallocated among states based on population changes, and the shapes and political contents of each district are determined by state governments, those decisions supervised by the courts. We do rig and gerrymander, but have been in serious pursuit of “one man, one vote” for 50 years. The House now has 240 Republicans, 190 Democrats, and 5 vacancies. That huge Republican majority arrived in 2010, the 63-seat net gain by Republicans the largest in any election since 1938. The most surprising thing to me in the 2012 election forecasts: no poll expects the Democrats to recapture more than 10 seats, and most think 5.
Deeper into grass roots… Bloomberg reported this week that both houses of 15 state legislatures are controlled by Democrats. 26 by Republicans.
If you’re reading this you’re a policy junkie of some sort. The best visual of our electoral divide is CNN’s John King and his magic map, county-by-county, Red or Blue or undecided grey. On every one of King’s maps, Blue America is an urban archipelago floating in a Red rural sea, suburban beachheads decisive.
I met a certified Lefty here, a program director for a civic group, professionally a therapist, both of us arriving too early for the show. I asked her views, saying no argument intended, just curious. She described fear among her circle, clients and friends; fear that the helping hand of government would be withdrawn from those with no other recourse. She said that was her main motivation to vote with Democrats, and laughed as she said the rest of her family were not so damned pleased by her leanings.
Where are they? Small town on the prairie 150 miles east. And how are they, and what are they thinking? They are afraid. Of? They get up early, they work killing hours, they look after each other, their neighborhoods and churches, and they’re afraid that the government people will bury them with rules and take more of what little they have, and then there won’t be anyone to help.
Buy any election theory that you like, except this one: good guys versus bad guys. We are far more alike in the most important ways than different. And we are all struggling to figure what we should do together.
Friday, October 19, 2012
Capital Markets Update
By Louis S. Barnes Friday, October 19th, 2012
Long-term rates rose in the last ten days, at their worst the 10-year T-note to 1.83% from 1.65%, and mortgages to 3.50% despite the Fed’s new $40-billion-per- month QE3.
Many fear a general round of rate increases for the usual reasons: Europe back from the brink, an overdone bond-buying panic, a positive turn in the US economy, and the always-popular endgame of central bank money printing. It’s often hard to isolate the cause of market movements, but not this one. Nor is it hard to spot the reversal today, 10s back to 1.77%, stock market hitting a li’l ol’ air pocket.
Europe has been central to this spike, hopes there high for the two-day Brussels summit ending today. Markers: the euro itself rising to $1.31, and yields on Spanish bonds down almost by half. It is hardly an accident that rates here topped yesterday as the summit turned out to be yet another exercise in talking about more talking. Market pressure is down for the moment in the euro-zone, as nobody wants to lash himself to tracks in front of a potential ECB rescue locomotive, no matter how foggy the prospect. As it has seemed for a year, the euro issue will be forced by the social pressure and politics of open-ended depression, and nobody has a model for that groundswell.
Economic data here… all is relative. Those expecting recession have been wrong. The ECRI has forecast recession for a solid year, but its own index has turned up. Lest that thought overwhelm you with optimism, it is “up” into no-man’s-land.
Housing… for reasons best known to stock-pushers, public analysts focus on sales and construction of new homes, which at cyclical peaks account for perhaps 4% of GDP. Yes, one can add the contribution of drapes, furniture, appliances, and landscaping, but the big deal is prices, always and especially during this collapse of household balance sheets. Sales of existing homes influence the value of some 70 million dwellings; new homes now are 1% of that figure. Existing sales are up 11% year-over-year, and the distressed fraction is down from about 35% to maybe 30% — good news but not enough to pull the economy anywhere.
Shifting gears to a subject central to Europe and soon to be here, the IMF this week released some new thinking on the austerity “multiplier.” If a nation cuts its budget deficit by an amount equal to 1% of GDP, how much will it cut GDP? Old thinking had assumed .5%, but actual experience in Europe has led the IMF to a multiplier in the range of .9% to 1.7%. There you have the physics of black holes. The more you try to cut your deficit, whether by tax increases or spending cuts, your economy falls out from under you faster that you can repair your national wallet.
Side note. The austerity multiplier in Europe may be so high for other reasons, namely the insanity of bolting low-productivity economies to the currency of an uber-productive one. Thus the high multiplier there may have no grim implication for the US.
In any event, the Left and most of Center in Europe (and soon, here) howl that austerity is too much too fast, and what we need is stimulus, usually in the form of “investment.” Properly calibrating austerity is serious business, but the stimulus multiplier is in question, too. Prof Michael Pettis writes the best English-language China blog www.mpettis.com , and this month explores the difference between stimulus and pork. Any government spending adds some sugar, but must over time add specific and measurable productivity beyond cost. Every friend returning from China and Europe remarks on the gleaming newness of infrastructure, but are these investments an addition to productivity, or a warmer, dryer place for panhandlers in a meltdown?
Investment has been so overdone in China that its stimulus multiplier may be zero.
The most concerning element in these multipliers: what happens at crossover? When you can no longer afford austerity, but your finances are so poor that you can’t borrow more money for stimulus? You can dream for a while about the magic free-money machine at central banks, but Argentina and Zimbabwe are plain-sight lessons.
What happens? You are going to default. Then you can start over.
Friday, October 12, 2012
Capital Markets Update
By Louis S. Barnes Friday, October 12th, 2012
Financial markets are surprisingly stable, especially credit markets. Following the Fed’s September QE3 announcement of open-ended intent to buy mortgage-backed securities, the 10-year T-note left to the mercy of markets, 10s have not traded above 1.75% or below 1.50%. Meanwhile, 30-fixed mortgages have broken as low as 3.25%.
That spread — 10s/MBS roughly 1.60% — is the lowest/tightest since previous normality hit the wall in 2007. I had thought that Mortgage Absolute Zero was about 3.00%, but if the Fed buys MBS for long enough to work off presently infinite refinance demand (many months, maybe EOY 2013), retail mortgage prices can fall below the 3.00% barrier just by more compression of spread.
Today, the main thing holding rates above 3.00% is the profiteering of big banks, increasing their margins as the Fed tries to shrink them. The worst of the piracy: jacking margins on refis of underwater households. I would say, “Shame,” but to no effect on bank boards and executive suites ethically un-reformed through this whole process. All the new rules in the world cannot substitute for a sense of citizenship.
While we enjoy new, super-historical lows, more in prospect, consider the causes….
US data is as unchanged as can be, on a 1.5%-2.0% GDP slope but fragile. The September small-biz survey by the NFIB downshifted by an undetectable 0.1%. The trade picture was a bit more cautionary, both imports and exports contracting; imports slide when US demand fades, and exports dim when the outside world fizzles.
The strongest positive here is housing, but its improvement is far oversold in media commentary. Most economic punditry comes from financial markets, which had housing wrong all the way down, and can be counted upon to have it wrong on the way up. Housing industry analysts tend to perpetual optimism, correct only by accident.
The finance guys cannot process the differences between their markets and housing: their securities are uniform and move all together, while our houses are no-two-the-same and any concerted market movement is at the neighborhood level. Terms of credit affect stock and bond markets, but nothing like housing. Imagine if you wanted to sell a share of Apple today, and had a willing buyer at $630 but the NASDQ exchange required an independent appraisal of the stock, made you wait two weeks, and then capped the price at $500 based on “sound underwriting.”
Housing now enjoys very gradual improvement, especially in states whose foreclosure-by-trustee has speeded the process. However, the “recovery” that finance types see propelling the entire economy is still over the horizon. “Mortgage Equity Withdrawal” is a measure of net contribution of housing to personal income, during the bubble adding as much as 10% per year(!). Since 2008 MEW has subtracted about 3% annually from personal income, and still does — no mere headwind, but hail in the face.
The greatest risks are overseas, quantifiable in some ways, but timing unknown. Greece lies prostrate in depression, its national debt still 160% of GDP requiring another restructuring transfusion. That debt is now held by European governments, the ECB and the IMF, none of which can face the need to write off the two-thirds necessary to allow the Greek economy to function. Thus the next transfusion will be just enough to buy time, not for Greece itself, but the utterly corrupt European leadership.
That leadership had a signal week on other grounds. France-based EADS and UK-based BAE were close to merger, $90 billion in combined aerospace and defense sales, the merger a benefit to both, enabling competition with the likes of Boeing. Any big merger in Europe requires multi-governmental approval, and Germany insisted on a Munich HQ for the new company and expansion of German operations. All media concur: on Wednesday Angela Merkel personally pulled the plug on the merger, and Germany did not attempt any form of denial. “One Europe” the euro objective? Sure.
The global balance is delicate, but the economic/political weakness in Europe, China, and emergings still strongly favors the US, if only by removing any threat of inflation, which is the prerequisite for continuing QE3 and super-low rates here.
Friday, October 5, 2012
Capital Markets Update
By Louis S. Barnes Friday, October 5th, 2012
The first week of every month brings the largest and freshest load of economic data. For once, don’t pay attention to it for three reasons: the data do not show meaningful change; the most important data by far is overseas; and third… for the next month, politics matter more than anything.
Before Tuesday evening, everybody could hear Brunnhilde warmin’ up.
On Tuesday night my wife, Bronx-born native Democrat, 25-years an RN delivering babies, women’s rights combatant unimpressed by puffed-up males in white coats — as apolitical as I am a total junkie — at 6:57pm MST came to sit on the couch. She did not move for an hour and a half. I took out recycling, got some booze, read my book; she stayed put. She asked some questions about health care math, who Bowles and Simpson might be, but stayed glued to the show. Maybe one-third of the way in she observed, “Obama looks awful.” A little past halfway, “If the election were tomorrow, I’d vote for Romney.”
Knock me over with a feather. Part of her reaction, I think: Romney did not have a tail, nor horns growing out of his head. The greater surprise, after 18 months of televised bickering among unattractive Republicans, and an inert White House: that anybody watched. Watch we did, 67 million of us, almost 20 million more than watched the first debate in 2008. And no political operative has a model for the consequences of epic grass-roots tweeting and e-yodeling during and after the debate.
The election is not tomorrow, and my wife and zillions of others may change minds more than once. However, instead of a minds-made-up election, this one may be an extraordinary deferred-decision election, boredom until showtime.
Back to data. The twin ISM surveys taken at the end of September found manufacturing activity improving from just below breakeven 49.6 in August to 51.5, and the service sector from 53.7 to 55.1. These are not trend-changers, just stumbling on in the same mire. Today every financial-political engine asserts discovery of meaning in a reported 114,000-job gain in September, an 86,000 upward revision in summer numbers, and a half-million people taking part-time jobs improving the unemployment rate to 7.8%. Give it up. Every one of these data points is miles within the range of statistical accuracy, let alone trend.
Jack Welch’s remarks today (GE CEO, nickname “Neutron Jack”) asserting White House manipulation of jobs data, are harmful to us all. Give up on that argument. There is enough mistrust, and government stats are as straight as we can make them.
Long-term interest rates wrinkled upward at the jobs news, tons of people trying to find meaning in bonds, response to jobs and so on. Drop it. If anything, worried buyers of bonds sold a few on yet another hope for Euro-self-bailout, maybe Spain this weekend. Please. Germany’s ISM number crawled back up to 47.4 from 44.7 but will be back below 45 before it sees 50. France fell to 42.7, comparable to rock-bottom here in 2009, but not at bottom there. China is below 50, now persistently so, even in official stats which everyone assume (correctly, there) are overstated.
The action is here. All polls agree that changes in the Senate will be minor, likely still a thin Democratic margin, not a working majority. To my surprise, the mass of ornery Tea Pots elected to the House in 2010 will be back, only a handful sent home. The largest numerical shift in the House since 1948 will remain in place, the hard-Right ego of Eric Cantor able to block his own party caucus and any legislation.
If Mr. Obama is re-elected, he will face exactly the same people and intransigence as in the summer 2011 budget wreck, plus fermented ill-feeling. Yet, it may take a Democrat to lead entitlement reform and cuts in future-promised spending.
On the other hand, perhaps only a Republican can get the House under control, and it may not matter what kind of budget deal gets done so long as there is one. Fast.
I know who I’ll vote for, but I don’t know if it’s right, or how it will turn out. I am certain only of how much is riding on how it turns out.
The first week of every month brings the largest and freshest load of economic data. For once, don’t pay attention to it for three reasons: the data do not show meaningful change; the most important data by far is overseas; and third… for the next month, politics matter more than anything.
Before Tuesday evening, everybody could hear Brunnhilde warmin’ up.
On Tuesday night my wife, Bronx-born native Democrat, 25-years an RN delivering babies, women’s rights combatant unimpressed by puffed-up males in white coats — as apolitical as I am a total junkie — at 6:57pm MST came to sit on the couch. She did not move for an hour and a half. I took out recycling, got some booze, read my book; she stayed put. She asked some questions about health care math, who Bowles and Simpson might be, but stayed glued to the show. Maybe one-third of the way in she observed, “Obama looks awful.” A little past halfway, “If the election were tomorrow, I’d vote for Romney.”
Knock me over with a feather. Part of her reaction, I think: Romney did not have a tail, nor horns growing out of his head. The greater surprise, after 18 months of televised bickering among unattractive Republicans, and an inert White House: that anybody watched. Watch we did, 67 million of us, almost 20 million more than watched the first debate in 2008. And no political operative has a model for the consequences of epic grass-roots tweeting and e-yodeling during and after the debate.
The election is not tomorrow, and my wife and zillions of others may change minds more than once. However, instead of a minds-made-up election, this one may be an extraordinary deferred-decision election, boredom until showtime.
Back to data. The twin ISM surveys taken at the end of September found manufacturing activity improving from just below breakeven 49.6 in August to 51.5, and the service sector from 53.7 to 55.1. These are not trend-changers, just stumbling on in the same mire. Today every financial-political engine asserts discovery of meaning in a reported 114,000-job gain in September, an 86,000 upward revision in summer numbers, and a half-million people taking part-time jobs improving the unemployment rate to 7.8%. Give it up. Every one of these data points is miles within the range of statistical accuracy, let alone trend.
Jack Welch’s remarks today (GE CEO, nickname “Neutron Jack”) asserting White House manipulation of jobs data, are harmful to us all. Give up on that argument. There is enough mistrust, and government stats are as straight as we can make them.
Long-term interest rates wrinkled upward at the jobs news, tons of people trying to find meaning in bonds, response to jobs and so on. Drop it. If anything, worried buyers of bonds sold a few on yet another hope for Euro-self-bailout, maybe Spain this weekend. Please. Germany’s ISM number crawled back up to 47.4 from 44.7 but will be back below 45 before it sees 50. France fell to 42.7, comparable to rock-bottom here in 2009, but not at bottom there. China is below 50, now persistently so, even in official stats which everyone assume (correctly, there) are overstated.
The action is here. All polls agree that changes in the Senate will be minor, likely still a thin Democratic margin, not a working majority. To my surprise, the mass of ornery Tea Pots elected to the House in 2010 will be back, only a handful sent home. The largest numerical shift in the House since 1948 will remain in place, the hard-Right ego of Eric Cantor able to block his own party caucus and any legislation.
If Mr. Obama is re-elected, he will face exactly the same people and intransigence as in the summer 2011 budget wreck, plus fermented ill-feeling. Yet, it may take a Democrat to lead entitlement reform and cuts in future-promised spending.
On the other hand, perhaps only a Republican can get the House under control, and it may not matter what kind of budget deal gets done so long as there is one. Fast.
I know who I’ll vote for, but I don’t know if it’s right, or how it will turn out. I am certain only of how much is riding on how it turns out.
Friday, September 28, 2012
Capital Markets Update
By Louis S. Barnes Friday, September 28th, 2012
Financial markets are still trying to digest the Fed’s QE3 announcement (and the prospect of intervention by other central banks around the world), as well as newly arriving economic reports.
The big stuff is due next week (ISMs and jobs), but some jigsaw pieces this week were useful. Orders for durable goods crashed hard, down 13.2% in August, but only 1.6% excluding volatile transportation orders — and the index itself is volatile. Household incomes rose only 0.1% in August, consistent with flat wages.
Housing data continue to improve. One of the best indicators has been the Fannie-Freddie combined “serious delinquency” rate, loans 90+ days late or in foreclosure. From a normal level way below 1% (of 29,000,000 loans, $5.2 trillion) this category rose to 4.93% in Q1’10. Down to 4.02% by Q1’11, and in the most recent data to 3.50% in Q2’12. Slow, but very good news.
Right-wing propaganda notwithstanding, the serious delinquency problem has been far worse in private-market trash than at Fannie and Freddie. Nevertheless, total-market numbers are making progress, too. In August 2011, we had 3,840,000 homes somewhere between 90+ and in foreclosure, plus another 500,000 or so REO post-foreclosure. Today REO is about the same, but the pipeline is down by 300,000. Very slow, slower than Fannie and Freddie, but gradually draining this ocean of pain, and not so fast as to undercut stabilizing markets.
None of this data supports the need for and extent of QE3. Thus I stick to my guns of last week: the Fed acted from deep concern for instabilities in Europe and China.
All of which begs another question, horribly mangled in media and politics. Why the Fed’s sudden focus on reducing unemployment? Paul Volcker, new age avuncular hero, without hesitation drove unemployment over 11% in 1981 to stop an inflation problem. A “hawk” at the Fed is usually regarded as an inflation-fighter; today, the hawks who oppose Perfesser Bernanke’s activism do mutter about inflation, but its total absence as a hazard in the last 20 years means that to be a hawk today is to be a nest-sitter. Hatching nothing, just perched in perpetuity, and grumpy about anything moving at all.
The Perfesser has many other opponents. Father and son Paul, without a brain between them. Nest-sitters throughout the Right. Really nasty SOBs in markets, Rick Santelli leading, who object to the Fed because it interferes with their trading. If I’ve set a perfect bet on economic disaster, and the Fed jumps in to save the place… well, how dare they? Unfettered private markets! Then I get to cash in. If there is any.
I am not a fan of conspiracy theories. The following is too simple to be much of one, anyway. Perfesser Bernanke makes constant reference to unemployment now because he has to have protection from Fed-enemies, and does not have recession-quality data to support pre-emptive QE3 to protect the US from deepening external chaos.
The following is the “dual mandate” language from the 1977 amendment to the Federal Reserve Act:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
At the time, everyone in the markets hooted at the revision. Which is it? Maximum employment OR stable prices? Can’t have both for any length of time. The amendment was actually designed to prevent the Fed from doing anything bad to stop the inflation then plaguing the economy. Didn’t stop Volcker — he found his own fig leaf in phony “monetarism,” selling the nation on the need to control the money supply to stop inflation. He knew perfectly well that high rates and unemployment were necessary.
Perfesser Bernanke knows, too. He’ll abort QE3 in an instant if it turns out to be inflationary. But at the moment, the dual mandate is his fig leaf. Wish him well.
Financial markets are still trying to digest the Fed’s QE3 announcement (and the prospect of intervention by other central banks around the world), as well as newly arriving economic reports.
The big stuff is due next week (ISMs and jobs), but some jigsaw pieces this week were useful. Orders for durable goods crashed hard, down 13.2% in August, but only 1.6% excluding volatile transportation orders — and the index itself is volatile. Household incomes rose only 0.1% in August, consistent with flat wages.
Housing data continue to improve. One of the best indicators has been the Fannie-Freddie combined “serious delinquency” rate, loans 90+ days late or in foreclosure. From a normal level way below 1% (of 29,000,000 loans, $5.2 trillion) this category rose to 4.93% in Q1’10. Down to 4.02% by Q1’11, and in the most recent data to 3.50% in Q2’12. Slow, but very good news.
Right-wing propaganda notwithstanding, the serious delinquency problem has been far worse in private-market trash than at Fannie and Freddie. Nevertheless, total-market numbers are making progress, too. In August 2011, we had 3,840,000 homes somewhere between 90+ and in foreclosure, plus another 500,000 or so REO post-foreclosure. Today REO is about the same, but the pipeline is down by 300,000. Very slow, slower than Fannie and Freddie, but gradually draining this ocean of pain, and not so fast as to undercut stabilizing markets.
None of this data supports the need for and extent of QE3. Thus I stick to my guns of last week: the Fed acted from deep concern for instabilities in Europe and China.
All of which begs another question, horribly mangled in media and politics. Why the Fed’s sudden focus on reducing unemployment? Paul Volcker, new age avuncular hero, without hesitation drove unemployment over 11% in 1981 to stop an inflation problem. A “hawk” at the Fed is usually regarded as an inflation-fighter; today, the hawks who oppose Perfesser Bernanke’s activism do mutter about inflation, but its total absence as a hazard in the last 20 years means that to be a hawk today is to be a nest-sitter. Hatching nothing, just perched in perpetuity, and grumpy about anything moving at all.
The Perfesser has many other opponents. Father and son Paul, without a brain between them. Nest-sitters throughout the Right. Really nasty SOBs in markets, Rick Santelli leading, who object to the Fed because it interferes with their trading. If I’ve set a perfect bet on economic disaster, and the Fed jumps in to save the place… well, how dare they? Unfettered private markets! Then I get to cash in. If there is any.
I am not a fan of conspiracy theories. The following is too simple to be much of one, anyway. Perfesser Bernanke makes constant reference to unemployment now because he has to have protection from Fed-enemies, and does not have recession-quality data to support pre-emptive QE3 to protect the US from deepening external chaos.
The following is the “dual mandate” language from the 1977 amendment to the Federal Reserve Act:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
At the time, everyone in the markets hooted at the revision. Which is it? Maximum employment OR stable prices? Can’t have both for any length of time. The amendment was actually designed to prevent the Fed from doing anything bad to stop the inflation then plaguing the economy. Didn’t stop Volcker — he found his own fig leaf in phony “monetarism,” selling the nation on the need to control the money supply to stop inflation. He knew perfectly well that high rates and unemployment were necessary.
Perfesser Bernanke knows, too. He’ll abort QE3 in an instant if it turns out to be inflationary. But at the moment, the dual mandate is his fig leaf. Wish him well.
Friday, September 21, 2012
Capital Markets Update
By Louis S. Barnes Friday, September 21st, 2012
The market response to QE3 has been different than to 1 and 2, subdued this time. The initial upward burst in stocks has fizzled, and the run to commodities by those either fearful of inflation or hoping for it has also stalled. The 10-year T-note jumped almost to 1.90% from summer in the 1.50s, but has now retreated to 1.75%.
Only mortgages have behaved as expected, sitting at or slightly below the 3.50% all-time low, depending on the deal.
The usual weekly run of data on the current economy shed no new light, but deeper reports on credit and housing did enlighten, as did — may the saints preserve us — news from domestic politics.
Republican columnist David Brooks this week nailed Mitt Romney as behaving like Thurston Howell III, the clueless ascot-throated boob of Gilligan’s Island. Romney had done poorly while cast as Wall Street sharpie. Boob is fatal. Measured by the flow of campaign money, businesspeople have been the largest (only?) segment of the electorate to depart Obama for Romney, and I doubt they have processed Obama’s now likely re-election. What impact might awareness have on expansion and hiring?
A hint at an answer overseas: after his inauguration on May 15, new French president Francois Hollande proposed to cut the 2013 budget deficit by e30 billion, about 1.5% of GDP. The cut will be funded one-third by spending cuts, one-third by new taxes on business, and one-third by taxes on the rich. Since the announcement, new business in France has suffered its largest drop since the free-fall in 2009.
Every 90 days the Fed releases Z-1, its compilation of every nickel rolling and landing in the US economy. Some good news: the net worth of US households is today only $3.5 trillion below its 2007 level, and up $9 trillion from its 2008 nadir. 80% of the gain has been from stocks, a paper loss and rebound. Home values are still rumbling along bottom, little changed from the initial $7 trillion loss.
Household liabilities have fallen more than $1 trillion, all in the mortgage account. Second mortgages (all types) at first fell slowly from $1.1 trillion in 2007, the pace now accelerating (via foreclosure and short-sale wipeout), down to $813 billion. Trash mortgages crested at $2.2 trillion in 2007, and this fall will drop below $1 trillion.
Mortgages guaranteed by Fannie, Freddie and FHA/VA have been remarkably steady at $5.8 trillion. That pattern requires some thinking. The Fed has bought $1 trillion. The refi churning is a null set. Amortization knocks down the balance, but not much. Loans for home purchase add to the account, but only as they exceed payoffs from sales. There is no alternate supply of mortgage credit. Those who dream of privatized mortgages might glance at another Z-1 line: banks have dropped 1st mortgage holdings by 20% since 2007, the remainder only 43% of the government-sponsored sum.
The apparent stability in home-mortgage balances overall, outstandings down only from $11.2 trillion in 2007 to $10 trillion today, is misleading. At all accounts some 20% of the remaining balances are under water. They present both as a future loss and an inert supply not available for new transactions. The actual, in-practice decline in supply has been on the order of 35%, and trying to get a new loan from Fannie makes all borrowers and mortgage bankers themsleves feel like new-age Willie Suttons.
Nevertheless, prices of homes are beginning to rise. Some of the rising news is statistical artifact. NAR reports that the distressed fraction of sales of existing homes fell to 22% last month, down from 49% in 2009; no matter what exertion by analysts to adjust prices for distress, fewer of those homes selling unquestionably makes price increases look better than they really are for individual homes.
Ignore my quibbling with stats. The one, single patch of sunshine in this economy is prices of homes rising to any extent. Every dime up is a dime less under water. And the 5% miracle approacheth. 5% appreciation means that I can at last hire a broker and roll my equity into the new place I’ve needed for years and years. That’s how housing sales numbers will rise, probably for a long time ahead.
QE3 has awakened the inflation worrywarts, led by Richard Fisher, the braying jackass at the Dallas Fed (some of my family are Texans, but not even they can explain why so many down there are compelled to act out the stereotype). The worriers might spend more time studying data than talking. We are in the global deflation event of all time, inflation itself rolling over again into the danger zone.
The market response to QE3 has been different than to 1 and 2, subdued this time. The initial upward burst in stocks has fizzled, and the run to commodities by those either fearful of inflation or hoping for it has also stalled. The 10-year T-note jumped almost to 1.90% from summer in the 1.50s, but has now retreated to 1.75%.
Only mortgages have behaved as expected, sitting at or slightly below the 3.50% all-time low, depending on the deal.
The usual weekly run of data on the current economy shed no new light, but deeper reports on credit and housing did enlighten, as did — may the saints preserve us — news from domestic politics.
Republican columnist David Brooks this week nailed Mitt Romney as behaving like Thurston Howell III, the clueless ascot-throated boob of Gilligan’s Island. Romney had done poorly while cast as Wall Street sharpie. Boob is fatal. Measured by the flow of campaign money, businesspeople have been the largest (only?) segment of the electorate to depart Obama for Romney, and I doubt they have processed Obama’s now likely re-election. What impact might awareness have on expansion and hiring?
A hint at an answer overseas: after his inauguration on May 15, new French president Francois Hollande proposed to cut the 2013 budget deficit by e30 billion, about 1.5% of GDP. The cut will be funded one-third by spending cuts, one-third by new taxes on business, and one-third by taxes on the rich. Since the announcement, new business in France has suffered its largest drop since the free-fall in 2009.
Every 90 days the Fed releases Z-1, its compilation of every nickel rolling and landing in the US economy. Some good news: the net worth of US households is today only $3.5 trillion below its 2007 level, and up $9 trillion from its 2008 nadir. 80% of the gain has been from stocks, a paper loss and rebound. Home values are still rumbling along bottom, little changed from the initial $7 trillion loss.
Household liabilities have fallen more than $1 trillion, all in the mortgage account. Second mortgages (all types) at first fell slowly from $1.1 trillion in 2007, the pace now accelerating (via foreclosure and short-sale wipeout), down to $813 billion. Trash mortgages crested at $2.2 trillion in 2007, and this fall will drop below $1 trillion.
Mortgages guaranteed by Fannie, Freddie and FHA/VA have been remarkably steady at $5.8 trillion. That pattern requires some thinking. The Fed has bought $1 trillion. The refi churning is a null set. Amortization knocks down the balance, but not much. Loans for home purchase add to the account, but only as they exceed payoffs from sales. There is no alternate supply of mortgage credit. Those who dream of privatized mortgages might glance at another Z-1 line: banks have dropped 1st mortgage holdings by 20% since 2007, the remainder only 43% of the government-sponsored sum.
The apparent stability in home-mortgage balances overall, outstandings down only from $11.2 trillion in 2007 to $10 trillion today, is misleading. At all accounts some 20% of the remaining balances are under water. They present both as a future loss and an inert supply not available for new transactions. The actual, in-practice decline in supply has been on the order of 35%, and trying to get a new loan from Fannie makes all borrowers and mortgage bankers themsleves feel like new-age Willie Suttons.
Nevertheless, prices of homes are beginning to rise. Some of the rising news is statistical artifact. NAR reports that the distressed fraction of sales of existing homes fell to 22% last month, down from 49% in 2009; no matter what exertion by analysts to adjust prices for distress, fewer of those homes selling unquestionably makes price increases look better than they really are for individual homes.
Ignore my quibbling with stats. The one, single patch of sunshine in this economy is prices of homes rising to any extent. Every dime up is a dime less under water. And the 5% miracle approacheth. 5% appreciation means that I can at last hire a broker and roll my equity into the new place I’ve needed for years and years. That’s how housing sales numbers will rise, probably for a long time ahead.
QE3 has awakened the inflation worrywarts, led by Richard Fisher, the braying jackass at the Dallas Fed (some of my family are Texans, but not even they can explain why so many down there are compelled to act out the stereotype). The worriers might spend more time studying data than talking. We are in the global deflation event of all time, inflation itself rolling over again into the danger zone.
Friday, September 14, 2012
Capital Markets Update
By Louis S. Barnes Friday, September 14th, 2012
One thing is for sure. Mr. Bernanke’s announcement yesterday is the most extraordinary since the all-time previous: Paul Volcker on Columbus Day weekend 1979 said the Fed would allow interest rates to rise as high as necessary to defeat inflation.
As today’s problems are the polar opposite of 1979, and raising rates had long been the accepted and effective remedy for inflation, and Mr. Volcker’s policies succeeded in solving the problem, it is difficult further to compare these two moments.
“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases… until such improvement is achieved in a context of price stability.
…The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens.”
Other for-sure things: mortgage rates fell .25% instantly on the Fed’s promise to buy about 65% of mortgage paper created through the end of the year, but this morning at retail gave up more than half of that gain (partly profiteering by giant banks with no competition). The 10-year Treasury has had a bad month, bad week and bad overnight, yields rising from 1.55% to 1.87% (the Fed will not now increase its long-Treasury buys). The stock market in Dow terms has risen 250 points but looks gassy, trying to square Fed action with the reality of the need for it (the Fed did not take its most dramatic action ever because things are nifty out there).
One more for-sure: the US economy is NOT entering recession. Gasoline prices or no, retail sales rose .9% in August. The small-biz surveyor NFIB found a small increase in optimism among its members in August, and relative stability all through summer. Ominous, but not a killer, and reflecting weakness overseas, industrial production in August fell 1.2%, the most since 2009. Overall fragility, but not the self-reinforcing downward spiral marking recession, or close to it.
The unknowns are as dramatic as the announcement.
Why now? Why 50 days before a Presidential election? Why not wait until the week after? Mr. Bernanke only once before has acted in haste, the short-stroke cuts in Fed funds in January 2008, when it seemed one morning while trimming his beard in his mirror appeared beside him the face of Great Depression II. As nothing is immediately pressing in the US economy, perhaps his inside knowledge of Europe and China indicate things are rather worse over there, and the US engine must pull the world, and quickly?
This new QE3 structure runs only to the end of 2012, which dovetails with the Fiscal Cliff. If we go off, the Fed will have more to do; if it is delayed, less; if it is resolved by austerity, more; if by can-kicking… who can know. All of those eventualities depend of course on the mix of President and Congress elected, and their actions if any.
Urgency… Mr. Bernanke’s own time is coming to a close. His term ends in January 2014, which means a replacement nominated within the next 12 months, and rapidly approaching lame-duck status. He could succeed himself, if willing, if either Presidential candidate had the wisdom, but I cannot imagine anyone looking forward to Congressional confirmation hearings, no matter who the nominee.
Have no doubt at all… The actions of the Fed since the show stopped in 2007 have been the personal heroism of Mr. Bernanke, the only high officer in US government to rise to the occasion since the show stopped in 2007. And all of the others have failed to find so little as the grace to help him.
The overriding doubt, I am certain shared by the Chairman: will it work? Will it have enough force, the financial system still crippled? All worries of QE-inflation or currency debasement have been badly mistaken, but will they stay so? Will Bernanke have time and support from the next Administration? Congress? Internal revolt at the Fed?
Has this QE experiment been the right thing to do, and to triple-down now?
Duh.
Lead-pipe cinch.
One thing is for sure. Mr. Bernanke’s announcement yesterday is the most extraordinary since the all-time previous: Paul Volcker on Columbus Day weekend 1979 said the Fed would allow interest rates to rise as high as necessary to defeat inflation.
As today’s problems are the polar opposite of 1979, and raising rates had long been the accepted and effective remedy for inflation, and Mr. Volcker’s policies succeeded in solving the problem, it is difficult further to compare these two moments.
“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases… until such improvement is achieved in a context of price stability.
…The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens.”
Other for-sure things: mortgage rates fell .25% instantly on the Fed’s promise to buy about 65% of mortgage paper created through the end of the year, but this morning at retail gave up more than half of that gain (partly profiteering by giant banks with no competition). The 10-year Treasury has had a bad month, bad week and bad overnight, yields rising from 1.55% to 1.87% (the Fed will not now increase its long-Treasury buys). The stock market in Dow terms has risen 250 points but looks gassy, trying to square Fed action with the reality of the need for it (the Fed did not take its most dramatic action ever because things are nifty out there).
One more for-sure: the US economy is NOT entering recession. Gasoline prices or no, retail sales rose .9% in August. The small-biz surveyor NFIB found a small increase in optimism among its members in August, and relative stability all through summer. Ominous, but not a killer, and reflecting weakness overseas, industrial production in August fell 1.2%, the most since 2009. Overall fragility, but not the self-reinforcing downward spiral marking recession, or close to it.
The unknowns are as dramatic as the announcement.
Why now? Why 50 days before a Presidential election? Why not wait until the week after? Mr. Bernanke only once before has acted in haste, the short-stroke cuts in Fed funds in January 2008, when it seemed one morning while trimming his beard in his mirror appeared beside him the face of Great Depression II. As nothing is immediately pressing in the US economy, perhaps his inside knowledge of Europe and China indicate things are rather worse over there, and the US engine must pull the world, and quickly?
This new QE3 structure runs only to the end of 2012, which dovetails with the Fiscal Cliff. If we go off, the Fed will have more to do; if it is delayed, less; if it is resolved by austerity, more; if by can-kicking… who can know. All of those eventualities depend of course on the mix of President and Congress elected, and their actions if any.
Urgency… Mr. Bernanke’s own time is coming to a close. His term ends in January 2014, which means a replacement nominated within the next 12 months, and rapidly approaching lame-duck status. He could succeed himself, if willing, if either Presidential candidate had the wisdom, but I cannot imagine anyone looking forward to Congressional confirmation hearings, no matter who the nominee.
Have no doubt at all… The actions of the Fed since the show stopped in 2007 have been the personal heroism of Mr. Bernanke, the only high officer in US government to rise to the occasion since the show stopped in 2007. And all of the others have failed to find so little as the grace to help him.
The overriding doubt, I am certain shared by the Chairman: will it work? Will it have enough force, the financial system still crippled? All worries of QE-inflation or currency debasement have been badly mistaken, but will they stay so? Will Bernanke have time and support from the next Administration? Congress? Internal revolt at the Fed?
Has this QE experiment been the right thing to do, and to triple-down now?
Duh.
Lead-pipe cinch.
Friday, September 7, 2012
Capital Markets Update
By Louis S. Barnes Friday, September 7th, 2012
First, an expression of gratitude. Reality — new economic data and active central banks — has removed any duty to pay attention to the convention of either party. August job data released today were poor. The meager 96,000-job gain was cut in half by downward revisions to the two prior months, and the apparent decline in unemployment from 8.3% to 8.1% is a statistical quirk — the percentage of Americans at work and trying to find it fell to the lowest level since 1981.
There is no way to fund necessary government on a tax base so weak. Democrats are focused on grabbing larger pieces of a shrinking pie, and Republicans on helping those with pie to keep it, when the perfectly obvious task at hand is to grow the pie.
As poor as the job data were, other reports describe a minor miracle: the US is not entering recession. ISM August manufacturing slid further to marginal negative, 49.6 (from 49.8), under pressure from a slowing external world, but the ISM service sector surprised on the upside, to 53.7 (from 52.6).
Consensus this morning has this data weak enough for the Fed to announce another round of QE on September 13, perhaps focused on MBS. The prospect of more easing has had the stock market on the manic side of its bi-polar disorder, but flipping to depression when considering the reason for the easing: the economy is a mess, and new QE is not guaranteed to work.
All of the above is a brief interruption in the European drama. Yesterday the ECB announced its new plan to prevent collapse of the euro, ECB president Draghi once again huffing, “The euro is irreversible.” Of course it’s reversible — if it were not, Draghi would not have to say. And on another level, many senior officials in Europe seem to be posturing to avoid blame for the ultimate collapse. In Europe’s history, leaders who have caused this degree of pain have met an end dangling from a lamp post.
The ECB labored long and hard to gain approval for the new plan, Outright Monetary Transactions (“OMT”), but in the end the elephant gave birth to a mouse.
There are several available paths to euro collapse. Banks were on the way out last fall, and the ECB stopped that with the LTRO (one trillion euros in loans to banks). Another would be the inability of Spain and Italy to roll over their sovereign debt, hopelessly excessive relative to their GDPs. Those markets closed this spring, temporarily propped open by their domestic banks and legerdemain.
OMT mightily proposes to buy unlimited amounts of sovereign debt with invented money. However, the ECB will execute the OMT buys if and only if miscreant nations agree to the Greece treatment, surrendering control of their budgets to more austerity and ensuring deeper depression. And oh-by-the-way, for every euro we create to buy these bad bonds, we will sell another euro-worth of a different IOU in our vault, leaving the net cash injection into the European economy at zero.
This process is called a “sterilized” trade, unlike QE here in which the Fed tries to force-feed cash into an already-sloshed goose, but at least is trying. One extreme measure the ECB might adopt: un-sterilized OMT buys, which would crater the value of the euro and give weak economies a fighting chance via exports. Unfortunately that approach would create inflation in Germany and destabilize European trading partners.
If Spain or Italy does grovel to the ECB, or does the honorable thing, accepting the ECB’s terms while lying about compliance, only one benefit to their economies will result. Each percentage point knocked off their borrowing costs will be roughly one point of GDP less in spending cuts that will be forced by the ECB Gestapo. Big deal. Their economies cannot survive the cuts underway now. Not while bolted to the euro.
My cynicism may be too deep, as always, but OMT has done nothing but protect Draghi from post mortem accusations of hand-sitting, and the political structures in Spain and Italy (and soon, France) are under the same pressure as before.
Bill Clinton’s Law, dating to 1993, seems more elusive today than ever, even to the old rogue himself. “It’s the economy, stupid!” Grow the damned pie, or else.
First, an expression of gratitude. Reality — new economic data and active central banks — has removed any duty to pay attention to the convention of either party. August job data released today were poor. The meager 96,000-job gain was cut in half by downward revisions to the two prior months, and the apparent decline in unemployment from 8.3% to 8.1% is a statistical quirk — the percentage of Americans at work and trying to find it fell to the lowest level since 1981.
There is no way to fund necessary government on a tax base so weak. Democrats are focused on grabbing larger pieces of a shrinking pie, and Republicans on helping those with pie to keep it, when the perfectly obvious task at hand is to grow the pie.
As poor as the job data were, other reports describe a minor miracle: the US is not entering recession. ISM August manufacturing slid further to marginal negative, 49.6 (from 49.8), under pressure from a slowing external world, but the ISM service sector surprised on the upside, to 53.7 (from 52.6).
Consensus this morning has this data weak enough for the Fed to announce another round of QE on September 13, perhaps focused on MBS. The prospect of more easing has had the stock market on the manic side of its bi-polar disorder, but flipping to depression when considering the reason for the easing: the economy is a mess, and new QE is not guaranteed to work.
All of the above is a brief interruption in the European drama. Yesterday the ECB announced its new plan to prevent collapse of the euro, ECB president Draghi once again huffing, “The euro is irreversible.” Of course it’s reversible — if it were not, Draghi would not have to say. And on another level, many senior officials in Europe seem to be posturing to avoid blame for the ultimate collapse. In Europe’s history, leaders who have caused this degree of pain have met an end dangling from a lamp post.
The ECB labored long and hard to gain approval for the new plan, Outright Monetary Transactions (“OMT”), but in the end the elephant gave birth to a mouse.
There are several available paths to euro collapse. Banks were on the way out last fall, and the ECB stopped that with the LTRO (one trillion euros in loans to banks). Another would be the inability of Spain and Italy to roll over their sovereign debt, hopelessly excessive relative to their GDPs. Those markets closed this spring, temporarily propped open by their domestic banks and legerdemain.
OMT mightily proposes to buy unlimited amounts of sovereign debt with invented money. However, the ECB will execute the OMT buys if and only if miscreant nations agree to the Greece treatment, surrendering control of their budgets to more austerity and ensuring deeper depression. And oh-by-the-way, for every euro we create to buy these bad bonds, we will sell another euro-worth of a different IOU in our vault, leaving the net cash injection into the European economy at zero.
This process is called a “sterilized” trade, unlike QE here in which the Fed tries to force-feed cash into an already-sloshed goose, but at least is trying. One extreme measure the ECB might adopt: un-sterilized OMT buys, which would crater the value of the euro and give weak economies a fighting chance via exports. Unfortunately that approach would create inflation in Germany and destabilize European trading partners.
If Spain or Italy does grovel to the ECB, or does the honorable thing, accepting the ECB’s terms while lying about compliance, only one benefit to their economies will result. Each percentage point knocked off their borrowing costs will be roughly one point of GDP less in spending cuts that will be forced by the ECB Gestapo. Big deal. Their economies cannot survive the cuts underway now. Not while bolted to the euro.
My cynicism may be too deep, as always, but OMT has done nothing but protect Draghi from post mortem accusations of hand-sitting, and the political structures in Spain and Italy (and soon, France) are under the same pressure as before.
Bill Clinton’s Law, dating to 1993, seems more elusive today than ever, even to the old rogue himself. “It’s the economy, stupid!” Grow the damned pie, or else.
Friday, August 31, 2012
Capital Markets Update
By Louis S. Barnes Friday, August 31st, 2012
At the end of each August, the world’s central bankers gather in Jackson Hole, Wyoming. Sit around the ol’ campfire singin’ sad songs, goin’ fishin’ in pin-striped suits, and tellin’ tales about the big trout that got away. This year, most of ‘em.
Despite the risk of feeding conspiracy theorists, it’s good to know that these people talk with each other constantly. The People’s Bank of China comes to Jackson. Money is money everywhere, the problems different but the same, and today are tightly linked. Mangled policy in Europe creates risk in China, and makes it all the more difficult for China to adjust its own severe imbalances.
One central banker is missing: in the midst of widespread expectation of ECB bond-buys, its chairman Mario Draghi 48 hours ago cancelled his scheduled Jackson speech. One thing is certain: if you’re afraid to leave town, you don’t have a deal.
Perfesser Bernanke spoke today shortly after smoky Wyoming sunrise. Markets hoped for immediate announcement of new QE, and didn’t get it. They did get a defense of QE dismissive of its critics: It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-2009 recession would have been deeper….” Then, “Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve.”
Markets held breath, fearful the Perfesser was backing out of the game, but got the clincher: “The stagnation of the labor market is in particular a grave concern… The Federal Reserve will provide additional policy accommodation as needed….”
There are four basic views of central bank policy: 1) these monetary authorities create more trouble than benefit and should be locked to rules or gold, or closed; 2) they may be active in deep emergencies but should quickly return only to maintaining stable prices; 3) they should be as active as necessary without risking inflation; and 4) if economies are dangerously slow, create inflation.
All but the first (which appeals only to those ignorant of 1930-32) involve “printing money” — merely a question of how much. Option two is the prescription of the bureaucrat: “Who, me… do something?” Option four is the darling of the Left, championed twice-weekly by disgraceful Paul Krugman.
Option three is the only game, and no financial matter more confuses the public (and most policy makers) more than how to print money without inflation.
Here in the US we still have a broken credit system. We have taken most losses and significantly re-capitalized, but credit is choked in circular fashion by a poor economy, low values of assets (houses), and weak employment. The worst damage: we’ve been doddfranked, the new-age synonym for arbitrary and self-destructive over-regulation.
The Fed’s QE “prints” into a banking system with no outlet. Thus its result is limited to pulling down long-term interest rates and forcing cash from ultra-safety into risk. The link between inflation and credit is very strong: can’t ignite anything with soaked kindling, and it’s the Fed’s duty to offset the credit shortage.
The ECB’s problem is entirely different. Euro-zone banks have not taken losses, especially on sovereign paper, and have not recapitalized. The ECB has done some printing, but injected cash only versus collateral. If it begins to print to buy bad bonds outright, directly funding the budget deficits of the weak, cumulative and new… there is nothing more inflationary. Thus it must force an offset: a guarantee of austerity among the weak. Circularity is a plague common to central bankers. We can ease your transition to sound fiscal affairs, but not by free money inducing inflation: you must do your painful part.
That is a fair deal, much like the UK’s policy. However, the UK has one government. The ECB has no means to enforce austerity, and dare not print in volume only to discover that the weak have slipped the hook once again. The UK has made more progress than it gives itself credit, and here in the US a great deal more. Europe, three years into crisis… none at all.
At the end of each August, the world’s central bankers gather in Jackson Hole, Wyoming. Sit around the ol’ campfire singin’ sad songs, goin’ fishin’ in pin-striped suits, and tellin’ tales about the big trout that got away. This year, most of ‘em.
Despite the risk of feeding conspiracy theorists, it’s good to know that these people talk with each other constantly. The People’s Bank of China comes to Jackson. Money is money everywhere, the problems different but the same, and today are tightly linked. Mangled policy in Europe creates risk in China, and makes it all the more difficult for China to adjust its own severe imbalances.
One central banker is missing: in the midst of widespread expectation of ECB bond-buys, its chairman Mario Draghi 48 hours ago cancelled his scheduled Jackson speech. One thing is certain: if you’re afraid to leave town, you don’t have a deal.
Perfesser Bernanke spoke today shortly after smoky Wyoming sunrise. Markets hoped for immediate announcement of new QE, and didn’t get it. They did get a defense of QE dismissive of its critics: It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-2009 recession would have been deeper….” Then, “Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve.”
Markets held breath, fearful the Perfesser was backing out of the game, but got the clincher: “The stagnation of the labor market is in particular a grave concern… The Federal Reserve will provide additional policy accommodation as needed….”
There are four basic views of central bank policy: 1) these monetary authorities create more trouble than benefit and should be locked to rules or gold, or closed; 2) they may be active in deep emergencies but should quickly return only to maintaining stable prices; 3) they should be as active as necessary without risking inflation; and 4) if economies are dangerously slow, create inflation.
All but the first (which appeals only to those ignorant of 1930-32) involve “printing money” — merely a question of how much. Option two is the prescription of the bureaucrat: “Who, me… do something?” Option four is the darling of the Left, championed twice-weekly by disgraceful Paul Krugman.
Option three is the only game, and no financial matter more confuses the public (and most policy makers) more than how to print money without inflation.
Here in the US we still have a broken credit system. We have taken most losses and significantly re-capitalized, but credit is choked in circular fashion by a poor economy, low values of assets (houses), and weak employment. The worst damage: we’ve been doddfranked, the new-age synonym for arbitrary and self-destructive over-regulation.
The Fed’s QE “prints” into a banking system with no outlet. Thus its result is limited to pulling down long-term interest rates and forcing cash from ultra-safety into risk. The link between inflation and credit is very strong: can’t ignite anything with soaked kindling, and it’s the Fed’s duty to offset the credit shortage.
The ECB’s problem is entirely different. Euro-zone banks have not taken losses, especially on sovereign paper, and have not recapitalized. The ECB has done some printing, but injected cash only versus collateral. If it begins to print to buy bad bonds outright, directly funding the budget deficits of the weak, cumulative and new… there is nothing more inflationary. Thus it must force an offset: a guarantee of austerity among the weak. Circularity is a plague common to central bankers. We can ease your transition to sound fiscal affairs, but not by free money inducing inflation: you must do your painful part.
That is a fair deal, much like the UK’s policy. However, the UK has one government. The ECB has no means to enforce austerity, and dare not print in volume only to discover that the weak have slipped the hook once again. The UK has made more progress than it gives itself credit, and here in the US a great deal more. Europe, three years into crisis… none at all.
Friday, August 24, 2012
Capital Markets Update
By Louis S. Barnes Friday, August 24th
“It’s quiet out there — too quiet.”
That line appeared again and again in 1950s horse operas, and we Western kids practiced daily the eye-squinted and growled delivery. We also worked at whistling the call of the meadow lark, the way the Native-Americans in those oaters signaled each other before their attacks. In our games, the short straws were the cowboys; our Sioux and Cheyenne always won in thrilling slaughter.
It is August, traditionally void of news, but this is really quiet. Eerie quiet.
Europe has fallen silent. Even the European Union no-content boys in Brussels have paused posturing. Monti, Rajoy, Hollonde… so quiet you could hear a euro drop in the Rhine. Draghi at the ECB after his excursion into bluster has corked himself altogether. Today Ms. Merkel broke her speaking fast to announce foursquare support for Greece and how much she wants it to stay on the euro (she may be a master of Europe on the order of Metternich and Bismarck, or an all-time blockhead, the power of her purse pushing her forward beyond talent — and I can’t find anyone who knows which).
The still-sealed tomb of a Chinese emperor is noisier than China’s current leadership. Japan is an exercise in origami in which paper is folded until it disappears altogether. And here a Presidential campaign which would be improved by silence.
You hear a meadow lark out there, wherever you are, best keep your head down.
Formal governments are paralyzed, and markets and the “leaders” themselves all turn now for rescue to hybrid, un-elected star chambers: the central banks. The Fed, the ECB, the PBOC, and the BOJ.
When one speaks, even without doing a thing, markets shake. The shock is still rippling from Wednesday’s release of month-old Fed meeting minutes. They sound as though they’ll ease again in some form, but no one knows how, or when, or to what effect. Stocks and other “risk assets” usually take off on new presumption of Fed easing, but not this time. 10-year Treasury yields did fall back to the center of their May-August range, but hardly an exuberant response. Suspicion is building that any new Fed operation will just buy time until fiscal and economic reckoning. Meanwhile, federal tax revenue in 2012 is running 15.7% of GDP versus 24% spending, and versus 2007 revenue at 18.5%.
Everyone assumes the ECB is collecting final political approval for its own QE, trying to suppress borrowing costs for the euro-wrecks. However, neither the ECB nor any European authority has a solution to the stimulus-austerity conundrum, so long as all are bolted to the euro.
In the best-by-far English language China blog, www.mpettis.com, Dr. Pettis asserts that a new round of PBOC stimulus will signal panic, more credit and investment making things worse, and marking aversion to desperately needed re-balancing of China’s economy away from state industries and toward consumers.
Many expect the BOJ to print Japan out of deflation. That would make 23 years of expecting, still counting.
Those who meditate find clarity in silence, and so this August we have it. The convergence of expectations of all four major central banks — results beyond their means — says with considerable clarity what comes next. In varying ways and times, in all four regions — US, Europe, China, Japan — economic deterioration will force dealing with their actual headwinds. The toughest part: to sort those who can support their debt from those who cannot, and to proceed with their assisted default. One or more may temporarily embark on the last mirage of the central bank, to print enough to induce inflation, but the ensuing catastrophe would caution the others.
Here in the US we enjoy the improbable position of having the best chance to act of the four. Either now or soon, we will be the only one with positive GDP. We may be the only one still with the capacity to deal with our existing debt and budget gap. How we do it will be disorderly beyond imagining, but that’s how we do things.
Saturday, August 18, 2012
Capital Markets Update
By Louis S. Barnes Friday, Augfust 17th, 2012
Two things this week: explain the sudden rise in Treasury and mortgage rates, and then provide a simple tool for understanding budget issues in the election. Nuthin’ to it.
In the last two weeks the 10-year T-note has run up from 1.45% to 1.85%, taking many mortgages from below 3.50% to above 3.75%. Explanations offered by sharpies: the economy has turned for the better, no longer sliding toward recession. Or because the Fed will not soon begin QE3 more bond-buying, either because the economy is better, or because it won’t do any good, or because of the election, or because of internal politics. Or rates have risen because Europe might save itself.
Put all that eyewash in a bucket. Then dump the bucket. July’s 0.8% up-wobble in retail sales is not a “turn” — not with the Philly and NY Feds’ indices sinking, not with small-biz NFIB returning to recession threshold, not with euro-zone GDP going negative, and not with China verging on distress. The Fed may not act now, but inflation is tipping again below the Fed’s target, and a solid majority at the Fed does not want to risk deflation or a run up in long-term rates.
When there is no “fundamental” economic explanation, look to “technical” — chart patterns reflecting the emotional condition of the herd. For nine months prior to April, the 10-year traded 2.00% (mortgages 4.00%-4.25%). Then 10s fell in a straight line to 1.50%, wandered at 1.60% in June, and then spent July in the 1.40s. At yields like these, nobody makes money on the rate; you make money when bond prices rise (yields falling more). A month with no buyers to take prices higher, and a few in the herd began to take profits, then many, and so prices will fall (rates rising) until low enough that they can rise again. 10s might go all the way back to 2.00%, might stop here, but rates are not going all the way back down until something ugly happens.
From that complexity to something simple. The budget. (Note: in the long run, the yield on 10s and the budget are linked. Heh-heh.)
Democrats say the Republicans are cruel, want to rob the poor to benefit the rich, and that Medicare and Social Security will be fine if rich people pay more taxes. Republicans say the nation is broke, Democrats will never stop spending and taxing, and besides, we’ve got ours. Each party offers to play a shell game with no pea.
We have to pay money for all the social goodies, and yet have to pay a social cost if we cut the goodies. Today we borrow $.41 of every $1.00 we spend, and we spend $80 billion each day. Something has to give, but what?
Any time you hear a pol’s pitch this fall, here’s the pea to put under all the shells: what’s the pol’s proposal as a percent of GDP?
Since WW II, federal spending has run about 20% of GDP, and revenue about 18%, a perpetual but modest deficit. Until the Great Recession. Spending is now 24% of GDP, and revenue 15%. The revenue decline is partly the result of the recession; reversal of the Bush tax cuts would not get revenue past 17% of GDP. That recession shortfall is the reason recovery is so desperately important. Rather worse, social-goody spending will take total spending over 30% of GDP in the next decade, health care doing 85% of the damage. Worse yet, our borrowing ability will be tapped out in a very few years. At the current pace… two years. If that. Then markets will pull our plug.
Many of my friends on the Left are soaked in European tax-rate propaganda, 35%-50% of GDP, but are blind to nationalized healthcare, railroads and so on, all requiring higher taxes and spending, and with intractable deficits. Republicans envisage a dinky government, 18% of GDP, but are utterly dishonest about the social cost, and are resistant to deep cuts in defense. Democrats refuse to consider any upward limit on GDP, or a budget deficit smaller than 3% of GDP.
The Bowles-Simpson www.fiscalcommission.gov “Co-Chairs Proposal” caps spending at 22%, eventually 21%, and raises revenue to 21%. Please read it.
Mr. Politician, don’t tell me what’s wrong with the other guy’s deal. Please do tell me what you want to do, and your GDP metric, and consequences. Then compromise.
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