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.
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