Capital Markets Update

By Lois S. Barnes                                     Friday, November 8th, 2013

In this weird economic-political time a few things are moving toward clarity.
Remember that awful government shutdown doing so much harm to the economy? Forget that. October payrolls jumped 204,000, plus another 60,000 revised up in September. The economic world flowed on around a furloughed government like a stream around an old, abandoned tire.
Did the shutdown conceal the long-awaited economic acceleration? No. Uh-uh. Half of these new jobs are in retail and hospitality/leisure. Entry jobs with zero upside and security. Wages in October grew again by 0.1%, half the rate of inflation.
The interest rate reaction to the job surge has been modest, and should be: in an eyeblink the 10-year T-note from 2.60% to 2.75%, mortgages pressing 4.50%. No big deal until the economy really changes, not yet, and still the mystery.
Third quarter GDP eye-popped to 2.8% annual growth, but one-third of that was accumulation of unsold inventories. Not a good sign for the fourth quarter, but there is no new recession in these cards.
The players in the economic mystery game are the Fed and political leadership. Everyone expecting a post-WW II cyclical pattern has been wrong, and citizens labor in a tangle of competing alternate-universe theories. Government is not the problem, nor is more government the solution.
One month, one election, and one website have dumped the political world on its head. Try to shift your anger at politicians toward comic relief, and genuine hope that the new predicaments afflicting both parties will force them to do useful things. A perfect metric of the month has been the Virginia gubernatorial race between Teapot Ken Cuccinelli and Clinton-hack Terry McAuliffe. Virginia ain’t what it used to be: some of its countryside still is, but the north is heavily infected by govermint Yankees.
Cuccinelli had annoyed enough normal people to give McAuliffe a steady 4% lead until the shutdown, which put McAuliffe into a 10% poll-taking landslide by October 20. Then, one little website oops-a-daisy and shutdown rage flipped to flipping off Democrats. McAuliffe eked out a win by 2.5%.
Both parties are now in trouble. The Republicans are making progress, their center acting quickly to weld a lid on the Teapots. The White House is in deepest disarray, yanked from its Wolkenkuckkucksheim (Aristophanes’ cloud-cuckoo-land via splendid German). There will be hell to pay if that website is not up as-promised by November 30. Just 22 software shopping days! And likely even more hell to pay once it’s up, and citizens find out how far ObamaCare diverges from promises.
Next year is an election year. Goody. Nobody in either party wants to run on its record, and blaming the other guy is done, too. These guys have to compete by actually getting beneficial things done. Right now, and together. Couldn’t be better.
The Fed has its own internal tangles, two big technical staff papers delivered this week advocating more and longer stimulus. The Fed has to taper QE because net MBS and Treasury issuance has fallen in half in 18 months, and the $1-trillion-per-year pace is too big and benefits thin. The Fed will rely on a longer-term promise to keep its rate low, maybe extending to 2017, which will do less than it hopes. Long-term rates will tip upward from time to time, limiting housing’s pull forward, but have a good chance to stabilize where they’ve been summer-fall.
Economic rescue? Depends on what you think the problem is. I am convinced that the entire world is caught in two very powerful deflationary forces: IT, and the entrance 20 years ago of two billion previously locked-out workers, IT magnifying the wage-leveling impact of labor oversupply. The Fed has done all it can, same for other central banks: let excessive private debt migrate to sovereign debt, which can be warehoused indefinitely, and compress rates and print cash as necessary to prevent deflation.
There is no fix for the oversupply. Only time, and meanwhile don’t do stupid things. The Teapot and ObamaCare crackups have gone a long way to prevent the latter.