Capital Markets

Friday June 28, 2013******************************************* By Lou Barnes Interest rates have stopped rising, but after a move as violent as this, markets should have improved and have not. Central bankers have fallen all over themselves to reverse Bernanke’s Bungle: Draghi at the ECB, King at the Bank of England, five regional Fed presidents and two governors, all to no result. The 10-year T-note straight-lined from 1.63% in early May to 2.60%, now stuck at 2.50%, mortgages 4.50% or more. Neither bad days in stocks nor weak data have had the power to push down rates. 1st Quarter GDP was revised from a pinking 2.4% to 1.8%, entirely because of over-measured consumer spending. To the bond market, the central bank choir is absurd, each speaker insisting that policy has not changed, but that growth will increase a lot in 2014, and that’s just because the Fed will not be as easy as it was, it is not tighter. Fool me once, shame on you, fool me twice, shame on me. If you have the day off on July 5, don’t forget to check that morning’s report of June employment data. Markets will be skeleton-staffed, a stupid choice of day which will magnify the effect of any surprise in the most important data of the month. Enough of beating on the USA just before our birthday. We’ve forgotten about Europe, and the best chance to knock our rates down is a frightful pratfall someplace else. In a big week, European Commission president Jose Barosso called Fance “reactionary” and posessed of an “anti-global agenda” for its effort to block an EU-US free-trade agreement. France is of course desperate to protect its un-competitive industries, suffocating in vats of government fat. The EU concluded another try at the “doom loop,” in which a nation’s finances are too busted to save a banking system three or four times its GDP. Since all except Germany are doom-loopers, banding together adds nothing to credit capacity unless they can get into Germany’s wallet. Nein. So the EU’s Djesselbloem announced success (Grimm’s tales pale at each crack of ‘bloem): a bank-failure agreement to haircut not just stockholders but any party which had loaned money to a bank, and large depositors, before reaching into an empty national treasury. And no multi-national assistance. And just when banks need more stockholders and long-term lenders. The bright light over there: Britain, its leaders nevertheless flayed for excessive “austerity.” Britain has had the best policy set anywhere: devalue the pound (which the doom-loopers cannot), reform banks (see above), BOE to QE (the Bundesbank will not allow), and cut government spending at the careful slope of 1% of GDP annually (Europe missing on one, two, and three cannot execute the fourth). The Left believes austerity is mean and unnecessary, that we should invest in infrastructure and cut spending some other decade when all is well. Part of the Fed’s problem with the levitating 10-year: our defict will fall this year to “only” $650 billion, and soon begin to rise again. The US sequester at $85 billion is one-half Britain’s discipline. An accounting error. As diets go, setting a limit at one piece of cake. Britain has gone for stomach stapling. Europe has embraced bulemia. Many on the Left point to the harmlesness of WW II borrowing to 125% of GDP. It was harmless, but at a cost. Imagine today fixed-price rationing of all staple goods. Imagine conscripting into national service 43,000,000 people, mostly young men, and paying them $210 per month. That was austerity (population and inflation-adjusted). Here we are, by a trillion candlepower the light of the world. Yet, our only functional element of government has been the person of Ben Bernanke, about to retire. Our economy is growing through mangled policy toward fiscal repair, and the Fed’s worst worry: the economy may get too hot next year. For 227 years the rest of the world has been unable to imagine how a free people in constant roiling chaos has pulled it off. I wonder from time to time myself. Happy 4th!!