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.
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