Friday, August 30, 2013
Captial Markets Update
By Louis S. Barnes ****************************Friday August 30th, 2013
Long-term rates stayed about the same this week, mortgages just above 4.50% for most products.
There are many things to write about this week, but the most important news for most Americans is the first retreat from Dodd-Frank toward common sense.
Economic data stayed in-pattern, reasonable growth without acceleration. Overall orders for durables goods fell 7% in July, but excluding volatile orders for airplanes and such gained .6%. Pending sales of homes fell 1.3% in July, but from an improved level. 2nd Quarter GDP was revised up from 1.7% to 2.5% annualized, but net of accounting gyrations still two-ish, way under the Fed’s forecast — as is inflation, barely 1% annualized. Consumer spending and incomes in July rose .1% versus forecast gains of .2% and .3% respectively.
The threat of action against Syria is still suppressing rates, but that won’t last long. A brief hail of Tomahawks won’t change anything, serious regional upset unlikely.
The Fed’s policy shift raising rates here is causing declines in emerging-nation currencies, but that is a perfectly normal self-corrective. US exports just set a new high, which says the dollar was somewhat undervalued, and emerging nations drunk on export demand from China will soon be helped by weaker currencies. The wrecks are wrecks (India, maybe Brazil), and the healthy will be fine (South Korea, Taiwan).
New budget collisions ahead in Congress create anxiety, but even Republicans understand that the nation is flat bored with the hysterical behavior of the teapots. A fall fizzle is more likely than a run over the brink.
All the above is minor-league today compared to excellent news for the country: six regulators agreed that the central mortgage provisions of Dodd-Frank are bad ideas. Dodd-Frank tried to define permissible mortgages, the Qualified Mortgage and Qualified Residential Mortgage. The QM standard would be a safe harbor for lenders, protection against claims of misbehavior, and the tighter QRM the benchmark for the worst idea to come out of the post-bubble period, the alleged need for lenders to have “skin in the game.” Any non-QRM would have required the lender to retain part of the risk.
Here, six years after mortgage misbehavior stopped cold, we still do not have a national understanding of what happened, laboring in ignorance, score-settling, and the entirely successful effort by Wall Street investment bankers to dodge accountability.
1. Pre-Bubble, every mortgage bank and broker was contractually obliged to repurchase any loan with deficient underwriting, whether it defaulted or not.
2. Commercial banks have always hated mortgage banks and brokers. Banks are ponderous and dim; brokers are light on their feet and live on their wits. Banks have huge balance sheets, brokers are small. Require brokers to grow balance sheets, and — voila! — a tough competitor is dead.
3. Loans against land pre-date Rome. US mortgage underwriting after 1929 was low-default, clear, of record, and did not require reinvention. Loans with small down payments need greater rigor, and with large ones need less, especially if the borrower has assets sufficient to pay off the loan (the latter two types still locked out today).
4. The Wall Street banks did not just buy bad loans 2000-2007, they designed and vacuumed them. They knew exactly what they were doing, the finest credit analysts in the world, and each firm thought it would be able to leave the market just before it blew. None did. The individual decision-makers, perps in suits, still scot-free.
This first pull-back from Dodd-Frank presages more “refinement” of that great legislative spasm, but don’t get your hopes too high. The containment of QM/QRM damage is not an easing of currently over-tight standards, just turning away from more tightening. In blackest comedy, the regulators cited as a principal reason to retreat that credit is already far too tight.
Restoration of common sense will gradually follow rates of default on new loans, by historic standards now almost undetectable.
Long-term rates stayed about the same this week, mortgages just above 4.50% for most products.
There are many things to write about this week, but the most important news for most Americans is the first retreat from Dodd-Frank toward common sense.
Economic data stayed in-pattern, reasonable growth without acceleration. Overall orders for durables goods fell 7% in July, but excluding volatile orders for airplanes and such gained .6%. Pending sales of homes fell 1.3% in July, but from an improved level. 2nd Quarter GDP was revised up from 1.7% to 2.5% annualized, but net of accounting gyrations still two-ish, way under the Fed’s forecast — as is inflation, barely 1% annualized. Consumer spending and incomes in July rose .1% versus forecast gains of .2% and .3% respectively.
The threat of action against Syria is still suppressing rates, but that won’t last long. A brief hail of Tomahawks won’t change anything, serious regional upset unlikely.
The Fed’s policy shift raising rates here is causing declines in emerging-nation currencies, but that is a perfectly normal self-corrective. US exports just set a new high, which says the dollar was somewhat undervalued, and emerging nations drunk on export demand from China will soon be helped by weaker currencies. The wrecks are wrecks (India, maybe Brazil), and the healthy will be fine (South Korea, Taiwan).
New budget collisions ahead in Congress create anxiety, but even Republicans understand that the nation is flat bored with the hysterical behavior of the teapots. A fall fizzle is more likely than a run over the brink.
All the above is minor-league today compared to excellent news for the country: six regulators agreed that the central mortgage provisions of Dodd-Frank are bad ideas. Dodd-Frank tried to define permissible mortgages, the Qualified Mortgage and Qualified Residential Mortgage. The QM standard would be a safe harbor for lenders, protection against claims of misbehavior, and the tighter QRM the benchmark for the worst idea to come out of the post-bubble period, the alleged need for lenders to have “skin in the game.” Any non-QRM would have required the lender to retain part of the risk.
Here, six years after mortgage misbehavior stopped cold, we still do not have a national understanding of what happened, laboring in ignorance, score-settling, and the entirely successful effort by Wall Street investment bankers to dodge accountability.
1. Pre-Bubble, every mortgage bank and broker was contractually obliged to repurchase any loan with deficient underwriting, whether it defaulted or not.
2. Commercial banks have always hated mortgage banks and brokers. Banks are ponderous and dim; brokers are light on their feet and live on their wits. Banks have huge balance sheets, brokers are small. Require brokers to grow balance sheets, and — voila! — a tough competitor is dead.
3. Loans against land pre-date Rome. US mortgage underwriting after 1929 was low-default, clear, of record, and did not require reinvention. Loans with small down payments need greater rigor, and with large ones need less, especially if the borrower has assets sufficient to pay off the loan (the latter two types still locked out today).
4. The Wall Street banks did not just buy bad loans 2000-2007, they designed and vacuumed them. They knew exactly what they were doing, the finest credit analysts in the world, and each firm thought it would be able to leave the market just before it blew. None did. The individual decision-makers, perps in suits, still scot-free.
This first pull-back from Dodd-Frank presages more “refinement” of that great legislative spasm, but don’t get your hopes too high. The containment of QM/QRM damage is not an easing of currently over-tight standards, just turning away from more tightening. In blackest comedy, the regulators cited as a principal reason to retreat that credit is already far too tight.
Restoration of common sense will gradually follow rates of default on new loans, by historic standards now almost undetectable.
Friday, August 23, 2013
Capital Markets Update
By Louis S. Barnes********************************Friday, August 23, 2013
As we approach the end of the traditional, news-starved Silly Season, there are important things going on. And some other things.
Release of the Fed’s July 31 meeting minutes on Wednesday collapsed the last courage in the bond market, 10-year T-notes to 2.90% and low-down, low-fee mortgages to 5.00%. The minutes were incomprehensible, but their failure to pull back from taper of QE3 means that it is still a “go.”
This morning Treasury short-sellers so pleased with themselves got clobbered by word that new home sales had fainted 13.4% in July, and June was revised down by 8%. The 10-year briefly to 2.81%. New home sales are measured by new contracts written, thus these June-July results are the first since mortgage rates jumped 1% from May to June. Correlation is not cause… some of the weakness is due to a shortage of inventory in turn caused by a shortage of credit to developers and builders.
Another upward force on long-term rates has been slightly better reports overseas: purchasing managers have new readings in China and Europe above the break-even 50 mark. This improvement is far more likely to be a temporary wobble than a trend change, but bonds and mortgages require a steady diet of bad economic news. US data continues a modest growth pattern with no sign of acceleration.
The sillies came in two places: the still-running QE debate, and the White House.
The Fed has obviously decided to exit QE as fast as it can, and then to unload what it has bought if it can. Why it is so spooked is mysterious, possibly an aspect of the Bernanke succession to someone who can be confirmed, and who has sufficient admiration of the President to be nominated. Some at the Fed may resemble Alec Guinness at the end of Bridge on the River Kwai (“My God — what have I done?”).
Much as markets are worried about doing without QE, an amazing crowd claims that it didn’t do anything, anyway. I was there, and it saved our sorry patoots. In 2008, as the world neared the Lehman brink, 10-year T-notes fell from 5.25% to 3.75% while mortgage rates rose to 6.50%, the largest spread on modern record. QE1 began in January 2009 and mortgage rates fell 1% in 30 days, 2% in one year.
In May the Fed forecast an end to QE, and mortgage rates rose 1% in 30 days. Yet, at the big Fed conference in Jackson Hole this week, one propeller-head after another says, nope, QE didn’t do a thing.
As QE leaves the scene we are going to find out how well-recovered the financial system is. Early returns are poor despite progress. A great many losses and write-offs are behind us, and a mountain of capital has been raised. Bad credits of the kind inflating the Bubble 2000-2007 are today inconceivable. However, we have empowered a generation of uber-regulators to layer on rules to be sure there will not be a new bubble, and to fireproof banking in general.
Nevermind that you could not today launch a synthetic CDO tranche with a canon, nor that there is no way to create cyclically safe banks. March ever onward to fight the last war! On Monday Mr. Obama called in Bernanke and the heads of the FHFA, CFPB, SEC, CFTC, FDIC, and NCUA to berate them for moving too slowly to enact regulations called for by Dodd-Frank, specifically to emplace the Volcker Rule (ending proprietary trading) and to be certain that by the end of this year all banks could fail. And to raise more capital, and to find fools to buy minimum amounts of long-term bank debt (you, too can be a water-barrel in front of a highway bridge abutment).
Fortunately a stern talking-to is mistaken for action by this White House, but damage is already serious. Since bubble peak in 2007, corporate bonds on bank-dealer balance sheets have fallen 76% (Bloomberg), and the volume of most-basic and secure liquidity (repurchase agreements, mostly of Treasurys) from $7 trillion to $4.6 trillion. Finding counterparties to execute a significant trade used to take minutes, now hours.
Past a certain point, de-risking banks just moves the risk someplace else. A world short on liquidity and credit is just as dangerous as one with too much.
As we approach the end of the traditional, news-starved Silly Season, there are important things going on. And some other things.
Release of the Fed’s July 31 meeting minutes on Wednesday collapsed the last courage in the bond market, 10-year T-notes to 2.90% and low-down, low-fee mortgages to 5.00%. The minutes were incomprehensible, but their failure to pull back from taper of QE3 means that it is still a “go.”
This morning Treasury short-sellers so pleased with themselves got clobbered by word that new home sales had fainted 13.4% in July, and June was revised down by 8%. The 10-year briefly to 2.81%. New home sales are measured by new contracts written, thus these June-July results are the first since mortgage rates jumped 1% from May to June. Correlation is not cause… some of the weakness is due to a shortage of inventory in turn caused by a shortage of credit to developers and builders.
Another upward force on long-term rates has been slightly better reports overseas: purchasing managers have new readings in China and Europe above the break-even 50 mark. This improvement is far more likely to be a temporary wobble than a trend change, but bonds and mortgages require a steady diet of bad economic news. US data continues a modest growth pattern with no sign of acceleration.
The sillies came in two places: the still-running QE debate, and the White House.
The Fed has obviously decided to exit QE as fast as it can, and then to unload what it has bought if it can. Why it is so spooked is mysterious, possibly an aspect of the Bernanke succession to someone who can be confirmed, and who has sufficient admiration of the President to be nominated. Some at the Fed may resemble Alec Guinness at the end of Bridge on the River Kwai (“My God — what have I done?”).
Much as markets are worried about doing without QE, an amazing crowd claims that it didn’t do anything, anyway. I was there, and it saved our sorry patoots. In 2008, as the world neared the Lehman brink, 10-year T-notes fell from 5.25% to 3.75% while mortgage rates rose to 6.50%, the largest spread on modern record. QE1 began in January 2009 and mortgage rates fell 1% in 30 days, 2% in one year.
In May the Fed forecast an end to QE, and mortgage rates rose 1% in 30 days. Yet, at the big Fed conference in Jackson Hole this week, one propeller-head after another says, nope, QE didn’t do a thing.
As QE leaves the scene we are going to find out how well-recovered the financial system is. Early returns are poor despite progress. A great many losses and write-offs are behind us, and a mountain of capital has been raised. Bad credits of the kind inflating the Bubble 2000-2007 are today inconceivable. However, we have empowered a generation of uber-regulators to layer on rules to be sure there will not be a new bubble, and to fireproof banking in general.
Nevermind that you could not today launch a synthetic CDO tranche with a canon, nor that there is no way to create cyclically safe banks. March ever onward to fight the last war! On Monday Mr. Obama called in Bernanke and the heads of the FHFA, CFPB, SEC, CFTC, FDIC, and NCUA to berate them for moving too slowly to enact regulations called for by Dodd-Frank, specifically to emplace the Volcker Rule (ending proprietary trading) and to be certain that by the end of this year all banks could fail. And to raise more capital, and to find fools to buy minimum amounts of long-term bank debt (you, too can be a water-barrel in front of a highway bridge abutment).
Fortunately a stern talking-to is mistaken for action by this White House, but damage is already serious. Since bubble peak in 2007, corporate bonds on bank-dealer balance sheets have fallen 76% (Bloomberg), and the volume of most-basic and secure liquidity (repurchase agreements, mostly of Treasurys) from $7 trillion to $4.6 trillion. Finding counterparties to execute a significant trade used to take minutes, now hours.
Past a certain point, de-risking banks just moves the risk someplace else. A world short on liquidity and credit is just as dangerous as one with too much.
Friday, August 16, 2013
Capital Markets Update
By Louis S. Barnes Friday, August 16th, 2013
Long Treasuries broke upward, out of the trading range of the last eight weeks. Not by much, but out, the 10-year T-note above 2.80% for the first time in more than two years, 2.86% at this moment. Mortgages are stickier, the rise negligible (investors have lost fear of another refi wave), but the march toward 5.00% is underway.
Two patterns are helpful, one 24-hours old, the other a 60-year vintage.
Before discussing those, dismiss a false lead: the 17-nation euro zone enjoyed positive GDP in the 2nd quarter, ballyhooed in US press as an “end to recession.” A positive quarter is the technical definition recession-end, but not even the Europeans believe this is anything more than a passing moment of stabilization.
Yesterday’s trading was instructive. News which should have helped long-term rates did not: Egypt’s descent into civil war, 200 points off the Dow, and zero-gain industrial production in July. News which overwhelmed all else and pushed up rates: new claims for unemployment insurance last week fell to a six-year low 320,000.
Thursdays’ market calculus is now persistent: jobs override all. If employment is strengthening, the Fed will taper QE to zero within six months. Thus stocks traded down on good economic news. I have never found a direct conveyor of QE cash to stocks, except running through the vacant minds of stock boosters. Whether real or imaginary, the mind prevails, but it does not say much for the investment-value underpinnings of stocks that good economic news is bad news.
The trading-desk shorthand for unemployment insurance applications is “claims.” Every US recession since the big war has ended in the same pattern: credit-sensitive housing and autos rebound as soon as the Fed cuts rates. The job market is the last to recover, often lagging housing by two years. Jobs are the most politically sensitive element, which typically forces the Fed to be too easy during recovery for too long — and which the Fed knows as surely as sunrise. Claims have been the best leading indicator for the Fed, but when claims plunge the Fed is already too late, forcing it into catch-up, which many fear today.
The Fed chopped rates in late 2008, but housing did not turn until 2012. Too much distress in the market, and tight credit offset cheap rates. Today, one year into housing recovery, right on schedule jobs are showing signs of life.
However, the job market today has headwinds even stronger than housing. For one, housing will continue to be thin until Congress and the White House take their feet off the mortgage hose. Even more important, since the early 1990s the US has faced unprecedented competition from labor overseas. Median household income had been stuck near $55,000/year from the mid-1990s until 2009 when it fell almost to $50,000, where it still is, and its purchasing power undercut by health-care racketeering.
Claims are down in part because there isn’t anybody left to fire. The drop in claims this time may not have cyclical counterparts: more jobs and higher incomes. The whole point of the Fed’s removing the punch bowl is to prevent overheating and inflation, but we can’t have either one without rising incomes. And they ain’t. And no economy anywhere ever overheated without a surge in credit. Not here, not hardly.
Another historical pattern: when the Fed appears to be turning, long-term rates always rise. And people like me always warn that the rise may abort the recovery, and it never has. This time is different in two ways (maybe). First, the panicked run up in long rates since May is not justified by Fed statements or implications, or by economic data — especially inflation. Too far too fast. Second, can it be that a still-impaired and mis-regulated financial system has been more dependent on QE than we or the Fed have known? Despite falling mortgage production and Treasury issuance, the Fed has been the only buyer, and rates must go much higher to find another?
Then there is the world. As US markets and the Fed conspire to jack long rates, they are rising everywhere. The US economy is better, but everywhere else is slowing or in trouble one way or another. Fainting elsewhere is our best chance for lower rates.
Long Treasuries broke upward, out of the trading range of the last eight weeks. Not by much, but out, the 10-year T-note above 2.80% for the first time in more than two years, 2.86% at this moment. Mortgages are stickier, the rise negligible (investors have lost fear of another refi wave), but the march toward 5.00% is underway.
Two patterns are helpful, one 24-hours old, the other a 60-year vintage.
Before discussing those, dismiss a false lead: the 17-nation euro zone enjoyed positive GDP in the 2nd quarter, ballyhooed in US press as an “end to recession.” A positive quarter is the technical definition recession-end, but not even the Europeans believe this is anything more than a passing moment of stabilization.
Yesterday’s trading was instructive. News which should have helped long-term rates did not: Egypt’s descent into civil war, 200 points off the Dow, and zero-gain industrial production in July. News which overwhelmed all else and pushed up rates: new claims for unemployment insurance last week fell to a six-year low 320,000.
Thursdays’ market calculus is now persistent: jobs override all. If employment is strengthening, the Fed will taper QE to zero within six months. Thus stocks traded down on good economic news. I have never found a direct conveyor of QE cash to stocks, except running through the vacant minds of stock boosters. Whether real or imaginary, the mind prevails, but it does not say much for the investment-value underpinnings of stocks that good economic news is bad news.
The trading-desk shorthand for unemployment insurance applications is “claims.” Every US recession since the big war has ended in the same pattern: credit-sensitive housing and autos rebound as soon as the Fed cuts rates. The job market is the last to recover, often lagging housing by two years. Jobs are the most politically sensitive element, which typically forces the Fed to be too easy during recovery for too long — and which the Fed knows as surely as sunrise. Claims have been the best leading indicator for the Fed, but when claims plunge the Fed is already too late, forcing it into catch-up, which many fear today.
The Fed chopped rates in late 2008, but housing did not turn until 2012. Too much distress in the market, and tight credit offset cheap rates. Today, one year into housing recovery, right on schedule jobs are showing signs of life.
However, the job market today has headwinds even stronger than housing. For one, housing will continue to be thin until Congress and the White House take their feet off the mortgage hose. Even more important, since the early 1990s the US has faced unprecedented competition from labor overseas. Median household income had been stuck near $55,000/year from the mid-1990s until 2009 when it fell almost to $50,000, where it still is, and its purchasing power undercut by health-care racketeering.
Claims are down in part because there isn’t anybody left to fire. The drop in claims this time may not have cyclical counterparts: more jobs and higher incomes. The whole point of the Fed’s removing the punch bowl is to prevent overheating and inflation, but we can’t have either one without rising incomes. And they ain’t. And no economy anywhere ever overheated without a surge in credit. Not here, not hardly.
Another historical pattern: when the Fed appears to be turning, long-term rates always rise. And people like me always warn that the rise may abort the recovery, and it never has. This time is different in two ways (maybe). First, the panicked run up in long rates since May is not justified by Fed statements or implications, or by economic data — especially inflation. Too far too fast. Second, can it be that a still-impaired and mis-regulated financial system has been more dependent on QE than we or the Fed have known? Despite falling mortgage production and Treasury issuance, the Fed has been the only buyer, and rates must go much higher to find another?
Then there is the world. As US markets and the Fed conspire to jack long rates, they are rising everywhere. The US economy is better, but everywhere else is slowing or in trouble one way or another. Fainting elsewhere is our best chance for lower rates.
Friday, August 9, 2013
Capital Markets
Friday August 9th *****************************************By Lou Barnes
Long-term rates have been unchanged for a month and a half, the 10-year T-note 2.50%-2.70%, mortgages near 4.50%. That stability is an illusion.
Trading desks now labor in deafening toe-tapping, pencil-drumming, fidgeting, and superstitious desk-rearranging (and sock selection) as everyone waits for the economy to declare itself. Will the Fed’s acceleration appear? Or another false dawn?
It’s going to take months to know, hence the rate paralysis. A thin week for data supported acceleration: the ISM service-sector jumped to 56.1 in July, way above expectation and one of the best readings in five years. Stocks are sliding, the fear of Fed withdrawing stimulus trumping a better economy — which seems odd, but so has the stock market run.
Do not believe news of European bottom, let alone turn. Germany is doing better, but its improvement reveals the fatal problem: its trade surplus is still 7% of GDP. Its weak partners trapped in the euro must be able to run surpluses of their own, including in trade with Germany. The zone cannot turn until Germany imports from the others, or subsidizes the others with its winnings from a euro undervalued for Germany’s productivity and overvalued for all the others.
Mr. Obama delivered his third speech of five on the economy. May the saints preserve us. Only two to go. This one was about mortgages, and the Fannie-Freddie badminton underway, swatting around feathered but no-fly proposals.
The speech was designed in part to head off the right-side rockheads who want to close the agencies and shut off any government support for mortgages. Hence a long song and dance about protecting taxpayers. A second purpose was to demonstrate the President’s knowledge of the subject and engagement with the economy and housing.
Better not to have tried. Technical speeches are better delivered by technical officers — the Secretary of the Treasury, or of HUD, charged with running the show.
The speech contained errors of fact and perspective, common to speakers cold to contrary ideas or correction. The first described his grandfather after WW II and the GI Bill helping him to get a loan from the FHA, and then the need for citizens to “save up to buy a home.” Savings are a good and necessary thing for families and the economy, but the President’s granddaddy got a VA loan, not FHA (created in 1934, not by the GI Bill in 1944), and VA loans then and ever since have not required down payments.
Accompanying White House fact-sheets attempting counter-right propaganda advocated “bright lines” in underwriting standards, and the President ridiculed “Liars’ Loans.” There are no bright lines. All is grey. Rigor should increase as down payments fall, and decrease as they rise. Some people can be trusted with nothing down, some can’t. In a 1912 Congressional investigation, the committee’s attorney asked J.P. Morgan if he would only make loans to those who already had money. Morgan: “The first thing is character. A man whom I do not trust could not get a loan even if secured by all the bonds in Christendom.” Local housing authorities with their mandatory counseling have made the same discovery, and exceptionally low rates of default.
Bulletin: Fannie and Freddie in the last 90 days rebated $20 billion in net income to the Treasury, on the road to repaying all assistance by 2015.
Late in the speech: “…We’re simplifying overlapping regulations; we’re cutting red tape…. We’ve got a Consumer Financial Protection Bureau… desigining a new, simple mortgage form.” Politics is politics. Puffery is part of the game. Still, I wonder what compells politicians to rise to trumpet things which everyone knows are false.
Fannie and Freddie will be around for quite some time, if only because they guarantee $6 trillion in MBS. Total first mortgages outstanding are about $9 trillion inclusive of the agencies, in the range of total assets in the entire US banking system. There is no conceivable source of private capital, not even at significantly higher rates to replace the liquid and government-guaranteed supply. Safe for now. Over time, as the bubble fades, true history of the agencies and lending will come forward.
Friday, August 2, 2013
Capital Markets
Friday August 2nd ******************************************By Lou Barnes
The net result of a Fed meeting and a blizzard of brand-new data for July: long-term rates are unchanged. But some other things are creaking along.
The Fed’s post-meeting minutes downshifted from “moderate” growth to “modest” (the words are synonyms in ordinary English, but not at the Fed). The April-June GDP seemed to outperform expectations, up 1.7%, but inclusive of revisions and weird accounting, plodded. The GDP measure of inflation: 0.8% annualized, less than half the Fed’s forecast. July ISM (the old purchasing managers’ index) jumped the forecast, clear over 55 and broke a weak trend. Today the whale: jobs data for July were disappointing in every respect, with revisions only two-thirds the jobs expected, declines in workweek and overtime, and wages rolled back part of June’s surprise gain.
Mortgage rate-watching is a simple affair, now. We will stay put if data continue to arrive below the Fed’s forecast for growth. Markets are badly frightened that the Fed may be right, and so sub-par news like this week’s brings no improvement — we need really lousy reports for rates to fall. If the Fed proves to be right, find a bunker.
The QE taper, coming even if data stay tepid, does not matter much. The improved US deficit and tanking production of mortgages mean less paper hitting the market, and reduced buying by the Fed will have the same proportionate effect as before.
The stock market’s serial new-record performances no doubt bring some wealth effect. However, fluff alert: the Sprouts IPO was offered at $18 and rocketed to $35. Grocery stores have notoriously narrow margins and no upside; there is room for only one Whole Foods fairy tale. And Facebook at last traded up to its IPO price, $38.
The greatest chance for a negative economic surprise is still overseas. China’s official PMI found 50.3 in July; private measurement said 47.7 and declining. Some European indicators appear to be bottoming. A couple of miles under water.
Here in the US the President is still back from wherever and delivered his second of five planned speeches on the economy. Five pages of text. The word “job” or its plural 49 times. Forty-nine. He means well, but has no idea how entrepreneurs think, take risks, or work. He is a professor of constitutional law and likes laws. A first-class merchant of rules.
The President has become entangled in the Fed, a bad place to be active. Markets have assumed all year that Janet Yellen would replace Bernanke. She is smart, tough, experienced at the institution, speaks clearly when she has something to say, otherwise quiet, and has been free of any internal or external controversy. A careful, politic person. Donald Kohn has surfaced as one of three finalists, and he has all the same qualities as Yellen. However, Kohn is 70, and carries Greenspan and Bubble baggage.
Meanwhile, Larry Summers has campaigned for the job, an elbowing without precedent. He is brilliant, abrasive, and impolitic. He would be the first Democrat to take the chair since Paul Volcker (mull that for a moment or two). He wants the job so desperately that he’ll make any bargain with Mr. Obama. He is a pure Keynesian demand-sider, a notch more coherent but on the Krugman program to spend, borrow, spend, and borrow. The absence of spending on “infrastructure and investments and stimulus” is of course Mr. Obama’s greatest frustration. Summers cannot enact spending at the Fed, but he would try.
Yesterday the President added unwelcome fuel in a visit to Capitol Hill. A Democratic congressman said “Bad choice” in reference to Summers, and Mr. Obama leapt to his defense. No way to know if that response indicates the President’s nomination leaning or just his usual grave irritation with anyone who dares to disagree with him.
Summers would be a high-risk, high-reward choice, his personality maybe a good thing for the Fed, squelching idiots who’ve had too much to say in the last eight years. However, Mr. Obama’s conducting this replacement decision in public and months too soon is unsettling to markets at a bad time, especially as it reminds them that the economy is not this President’s area of strength. For three-and-a-half more years.
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