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.