Friday, March 28, 2014
Capital Markets Update
By Louis S. Barnes Friday, March 28th, 2014
The action has been overseas this week, with little new economic data, all forces — anxiety, mostly — pushing long-term rates lower. Domestic information was on the weak side of hopes. Orders for durable goods, net of volatile items crept up 0.2% in February. Pending sales of homes continued to slide, now down 10.5% year-over-year, purchase-loan applications down about 16% YOY. Overseas, China’s manufacturing PMI continued its drop in negative territory, 48.1 in March from 48.5.
Weather gets the blame for everything here, but not there. The ECB in a grand mixture of blessings leaked intentions to do more to stimulate Europe’s economy, a simultaneous confession of the absence of recovery. Dominating everything: Tsar Vladimir’s intentions. When the world is worried it buys US Treasurys. It is difficult to explain higher bond prices and lower rates here except as safe-haven buying. There are unusually few safe places to go today, Europe and Japan unattractive, and the yuan not yet a true international currency. The more Russia sours, the more money comes here, so this is not a US scare story.
Today an exploration of the center of the Russian issues and possibilities for readers not used to them, or too young to remember the last times around. To begin, Russia is perpetually aggrieved, feeling oppressed by outsiders. In its westernmost advance, defeating Napoleon, it occupied Paris 200 years ago this weekend. Tsarist rot overtook Russia for the next hundred years. It lost its western provinces at Versailles in 1919. From 1945-1989 it pushed west once more, in Mr. Churchill’s phrase “An iron curtain from Stettin in the Baltic to Trieste in the Adriatic.”
When in 1989 the Soviet Union again collapsed of its internal rot, Bush the Elder did exactly the right thing. Nothing. No pursuit, no land-grabbing, nothing to engender a violent response from a cornered Russia. NATO has expanded, but France and Germany wisely denied membership to Belarus, Ukraine, Moldova, and Georgia for three reasons: not to humiliate Russia; second so that buffer states would separate NATO and Russia from direct borders; and third because these unfortunate provinces can’t be defended by force by NATO. Since the last Ice Age, living on flat ground anywhere in Europe has been ill-advised.
Vladimir in 2005: “The demise of the Soviet Union was the greatest geopolitical catastrophe of the century.” Acting now as though he means to rectify the matter brings a shiver to all of Europe. Vladimir is no Hitler or Stalin, but Mussolini would do. Politicians including tyrants are given to overstatement. Maybe that’s all there is to this. But Europe has taken a collective vow, after the experience of the last century, never again shall we redraw borders with armies. Vladimir is emboldened by the power of Russia’s fossil fuel reserves and weakness in the West. However, if he intends to stop with Crimea and low-level undermining of Ukraine, then this is all a minor adventure. Sad and troublesome, but no big deal. Even a rapid military grab for Ukraine would not trigger NATO military action. More serious sanctions to be sure, Europe making both the sacrifice and the decisions resulting in a slower global economy — but still possibly a benefit here.
However, if Vladimir absorbs the western buffer states, Belarus already in his orbit, then Russia will directly border NATO. The three Baltic states each has a large population of ethnic Russians. Between the Baltic states and Poland, retained in the 1989 collapse, lies the Russian Kalinin Military District, a major base and home port of the Russian Baltic Fleet. If Russia again borders those states, they and Poland at least must re-arm, and each may call on NATO Article Five for mutual self-defense. The process of demilitarizing Europe was long and bloody, but so thoroughly done that Europe unaided could not pacify Serbia, or defeat Libya. Europe’s economy is no help. Domino theories have gotten deservedly bad names. But in this situation there is only one domino separating Russia and NATO. That is a big deal.
The action has been overseas this week, with little new economic data, all forces — anxiety, mostly — pushing long-term rates lower. Domestic information was on the weak side of hopes. Orders for durable goods, net of volatile items crept up 0.2% in February. Pending sales of homes continued to slide, now down 10.5% year-over-year, purchase-loan applications down about 16% YOY. Overseas, China’s manufacturing PMI continued its drop in negative territory, 48.1 in March from 48.5.
Weather gets the blame for everything here, but not there. The ECB in a grand mixture of blessings leaked intentions to do more to stimulate Europe’s economy, a simultaneous confession of the absence of recovery. Dominating everything: Tsar Vladimir’s intentions. When the world is worried it buys US Treasurys. It is difficult to explain higher bond prices and lower rates here except as safe-haven buying. There are unusually few safe places to go today, Europe and Japan unattractive, and the yuan not yet a true international currency. The more Russia sours, the more money comes here, so this is not a US scare story.
Today an exploration of the center of the Russian issues and possibilities for readers not used to them, or too young to remember the last times around. To begin, Russia is perpetually aggrieved, feeling oppressed by outsiders. In its westernmost advance, defeating Napoleon, it occupied Paris 200 years ago this weekend. Tsarist rot overtook Russia for the next hundred years. It lost its western provinces at Versailles in 1919. From 1945-1989 it pushed west once more, in Mr. Churchill’s phrase “An iron curtain from Stettin in the Baltic to Trieste in the Adriatic.”
When in 1989 the Soviet Union again collapsed of its internal rot, Bush the Elder did exactly the right thing. Nothing. No pursuit, no land-grabbing, nothing to engender a violent response from a cornered Russia. NATO has expanded, but France and Germany wisely denied membership to Belarus, Ukraine, Moldova, and Georgia for three reasons: not to humiliate Russia; second so that buffer states would separate NATO and Russia from direct borders; and third because these unfortunate provinces can’t be defended by force by NATO. Since the last Ice Age, living on flat ground anywhere in Europe has been ill-advised.
Vladimir in 2005: “The demise of the Soviet Union was the greatest geopolitical catastrophe of the century.” Acting now as though he means to rectify the matter brings a shiver to all of Europe. Vladimir is no Hitler or Stalin, but Mussolini would do. Politicians including tyrants are given to overstatement. Maybe that’s all there is to this. But Europe has taken a collective vow, after the experience of the last century, never again shall we redraw borders with armies. Vladimir is emboldened by the power of Russia’s fossil fuel reserves and weakness in the West. However, if he intends to stop with Crimea and low-level undermining of Ukraine, then this is all a minor adventure. Sad and troublesome, but no big deal. Even a rapid military grab for Ukraine would not trigger NATO military action. More serious sanctions to be sure, Europe making both the sacrifice and the decisions resulting in a slower global economy — but still possibly a benefit here.
However, if Vladimir absorbs the western buffer states, Belarus already in his orbit, then Russia will directly border NATO. The three Baltic states each has a large population of ethnic Russians. Between the Baltic states and Poland, retained in the 1989 collapse, lies the Russian Kalinin Military District, a major base and home port of the Russian Baltic Fleet. If Russia again borders those states, they and Poland at least must re-arm, and each may call on NATO Article Five for mutual self-defense. The process of demilitarizing Europe was long and bloody, but so thoroughly done that Europe unaided could not pacify Serbia, or defeat Libya. Europe’s economy is no help. Domino theories have gotten deservedly bad names. But in this situation there is only one domino separating Russia and NATO. That is a big deal.
Friday, March 21, 2014
Capital Markets
By Louis S. Barnes Friday, March 21st, 2014
We interrupt coverage of Flight 370 for brief news from the world….
Interest rates rose this week on receding worry about Ukraine, and in the aftermath of the first Fed meeting with Janet Yellen in the chair, including her first public mistake (may as well get it over with).
Last week a sanction-war seemed imminent, one likely to suppress global economic growth. Chancellor Merkel on March 13: annexation of the Crimea “…Would not only change the European Union’s relationship with Russia. No, this would also cause massive damage to Russia, economically and politically.”
Then yesterday, the 20th, Merkel channeled Neville Chamberlain without evident embarrassment: “We will make very clear that in the case of further escalation we will be ready to introduce economic sanctions.”
At that, Vladimir must be laughing out loud in the brief digestive phase of a free lunch, soon to renew munching at Ukraine. Although there is no easy way for Europe to protect Ukraine, the means of Vladimir’s aggression should have been resisted with all vigor and at once. Instead, in Winston’s words nearly 80 years ago: “Europe has all the collective security of a flock of sheep.”
Markets don’t care about the long-term risks of Vladimir. In the near term a couple dozen kleptocrats have been denied visas to the beach at Easthampton this summer; markets will not care until Vladimir’s next big move, weeks to months away.
Rates jumped on Wednesday after the Fed’s meeting, but were going to go up anyway on the Ukraine relaxation, and “jump” is relative — from 10-year Treasury 2.65% to 2.75% is a bunny hop. Nevertheless, the Fed trigger was important.
The post-meeting statement affirmed the taper of QE buys at $10 billion per meeting. QE is now down to $55 billion per month, on track to conclude altogether by Halloween. Chair Yellen got an off-hand question: how long after the end of QE will the Fed raise the overnight cost of money, the Fed funds rate? “…Six months….”
Oops. The Fed is still trying to stimulate a weak economy. Remind markets of their hanging deferred only until they are healthy… they don’t take that well.
But Yellen didn’t really change anything, and the 10-year stopped dead where it had been two weeks ago, before the Ukraine frights. The Fed’s long-range forecast has for many months anticipated a rise in Fed funds before 2016, and markets understand that hike is conditioned on what happens between now and then. If Yellen changed anything substantial in her first statement, it was the dovish confirmation that the Fed will pay little attention to the rate of unemployment, instead watching broader labor indicators.
We are where we have been: in suspense, confused by a cycle out of all prior pattern. We rely on science, which in the Fed’s case is elaborate computer models of the entire US economy. Those who find science supporting their notions often wield “Science!” and “Silence!” as twin clubs in opposite hands.
This week a study in the Annals of Medicine reported on saturated fats as a cause of heart disease. Actually, nevermind about that. Trans fats, yes; burgers, have at ‘em. Last year, mammograms… nevermind. Three years ago, those PSA tests… um, just causing tens of thousands of unnecessary and crippling surgeries.
While we try to make sense of Fed science, market lab-coaters in allegedly responsible journals tell us that the Fed has distorted prices of everything. Meddling up the stock market and down yields. Buying time after old bubbles by creating new ones, but just buying time. Printing and debasing the currency. When the Fed fails we will either blow up into inflation or blow down in default and deflation. A few argue both risks simultaneously. I trust in basic Fed science. Betrayed by Crazy Alan, but still: when the economy is underperforming, keep interest rates at or below the inflation rate. When overheating, the converse. When in transition, take it slow unless transparently behind the curve. Chair Yellen is on the right track.
We interrupt coverage of Flight 370 for brief news from the world….
Interest rates rose this week on receding worry about Ukraine, and in the aftermath of the first Fed meeting with Janet Yellen in the chair, including her first public mistake (may as well get it over with).
Last week a sanction-war seemed imminent, one likely to suppress global economic growth. Chancellor Merkel on March 13: annexation of the Crimea “…Would not only change the European Union’s relationship with Russia. No, this would also cause massive damage to Russia, economically and politically.”
Then yesterday, the 20th, Merkel channeled Neville Chamberlain without evident embarrassment: “We will make very clear that in the case of further escalation we will be ready to introduce economic sanctions.”
At that, Vladimir must be laughing out loud in the brief digestive phase of a free lunch, soon to renew munching at Ukraine. Although there is no easy way for Europe to protect Ukraine, the means of Vladimir’s aggression should have been resisted with all vigor and at once. Instead, in Winston’s words nearly 80 years ago: “Europe has all the collective security of a flock of sheep.”
Markets don’t care about the long-term risks of Vladimir. In the near term a couple dozen kleptocrats have been denied visas to the beach at Easthampton this summer; markets will not care until Vladimir’s next big move, weeks to months away.
Rates jumped on Wednesday after the Fed’s meeting, but were going to go up anyway on the Ukraine relaxation, and “jump” is relative — from 10-year Treasury 2.65% to 2.75% is a bunny hop. Nevertheless, the Fed trigger was important.
The post-meeting statement affirmed the taper of QE buys at $10 billion per meeting. QE is now down to $55 billion per month, on track to conclude altogether by Halloween. Chair Yellen got an off-hand question: how long after the end of QE will the Fed raise the overnight cost of money, the Fed funds rate? “…Six months….”
Oops. The Fed is still trying to stimulate a weak economy. Remind markets of their hanging deferred only until they are healthy… they don’t take that well.
But Yellen didn’t really change anything, and the 10-year stopped dead where it had been two weeks ago, before the Ukraine frights. The Fed’s long-range forecast has for many months anticipated a rise in Fed funds before 2016, and markets understand that hike is conditioned on what happens between now and then. If Yellen changed anything substantial in her first statement, it was the dovish confirmation that the Fed will pay little attention to the rate of unemployment, instead watching broader labor indicators.
We are where we have been: in suspense, confused by a cycle out of all prior pattern. We rely on science, which in the Fed’s case is elaborate computer models of the entire US economy. Those who find science supporting their notions often wield “Science!” and “Silence!” as twin clubs in opposite hands.
This week a study in the Annals of Medicine reported on saturated fats as a cause of heart disease. Actually, nevermind about that. Trans fats, yes; burgers, have at ‘em. Last year, mammograms… nevermind. Three years ago, those PSA tests… um, just causing tens of thousands of unnecessary and crippling surgeries.
While we try to make sense of Fed science, market lab-coaters in allegedly responsible journals tell us that the Fed has distorted prices of everything. Meddling up the stock market and down yields. Buying time after old bubbles by creating new ones, but just buying time. Printing and debasing the currency. When the Fed fails we will either blow up into inflation or blow down in default and deflation. A few argue both risks simultaneously. I trust in basic Fed science. Betrayed by Crazy Alan, but still: when the economy is underperforming, keep interest rates at or below the inflation rate. When overheating, the converse. When in transition, take it slow unless transparently behind the curve. Chair Yellen is on the right track.
Friday, March 14, 2014
Capital Markets
Watching markets this week has been surreal. On the surface the usual tub-thumpers were at it: economy picking up, Fed’s going to tighten, stocks to infinity and beyond, and well-dressed technology drunks in every upscale gutter. The ordinary media is completely preoccupied with an airliner seized by aliens.
Underneath, two international issues have gone sour, and new US data is on the weak side. Retail sales tanked in December and January and rose a feeble .3% in February, only 1.3% above February last year. The weather argument does not hold. Measures of wholesale prices fell, as did consumer- and small-business confidence.
China and Russia drove long-term rates lower, more so than US data. Every new report from China shows slower growth as it tries to get credit under control and shift from excessive investment to a first-world economy. China continues to devalue the yuan, despite official protestations an obvious effort to boost its exports and counter Japan’s devaluation. The slowdown (also in Japan) hurts every economy in Asia, exports deflation to the West, and undermines Europe’s exports especially.
Russia… good heavens. Tsar Vladimir has turned a minor matter into something dangerous, and he is the sole cause. There is nothing of economic value to Russia in Ukraine. Russia could keep its naval base in Crimea undisturbed (see Russia’s Kaliningrad Military District, the enclave between Poland and Lithuania retained after 1989 Soviet bust-up). There is no popular push in Russia to retake old Tsarist/Soviet lands. This entire Ukraine grab is in the ego of Vladimir, the most dangerous of all sources of imperial adventure.
A great deal hangs on Vladimir’s actions after Sunday’s phony election in Crimea. The US and Europe appear to have drawn the line at Crimea, not allowing Vladimir even that snack, not waiting for a bigger grab in eastern Ukraine. Europe if anything is more firm than we are. Europe’s rationale for all the pain of the euro and unity is the determination never again to repeat the 19th and 20th centuries. They know Vladimir when they see him. They have seen his like many times.
Shooting war? No. Economic? Unless forces inside Russia pull Vladimir back, sanction-war will begin as soon as next week. Max Hastings has written the best new book on 1914, or pull out Barbara Tuchman’s classic, just the first few chapters of either. Conflict follows counterparties feeling wronged, each willing to bear sacrifice, each believing itself without options, each sure that it is tougher than the other.
From the scary to the knee-slapping ridiculous….
The White House and a bi-partisan group of senators have decided on a liquidation of Fannie and Freddie and a completely reconstituted US system of mortgage finance.
These are the same people who brought us ObamaCare and Dodd-Frank. Fear not: right-wing government-hating Republicans in the House will save us. Not because of fondness for Fannie, but because they hate Fannie worse than anybody and won’t allow government in any new system. A salvation deeply embarrassing to me, but given the fools in charge of this government, I’ll take anything.
Fannie since 1938 did get off-track, its semi-privatization a bad idea resulting in bloat and debt, but despite the worst financial disaster in US history has not cost the taxpayer a dime. The right says it hates these agencies because they pose a risk to the taxpayer. Aside from no loss, their beneficiaries are taxpayer-borrowers. The right’s real opposition rests on blind hatred of government, and wanting to be sure the wrong kind of people do not get loans. People not welcome at the country club.
Incredibly, this new legislation proposes semi-privatization worse than the old. “Fantasizes” is a better term. Instead of one issuer of MBS, several new mini-Fannies are supposed to spring up, take first loss on any loan, and government to guarantee the rest. If you don’t mind adding a couple of percent to mortgage rates (partly loss risk, partly a heterogeneous and illiquid fruitcake of new MBS), and consumers forced blindly into grab-bag underwriting, all a great idea. Mercifully DOA.
Underneath, two international issues have gone sour, and new US data is on the weak side. Retail sales tanked in December and January and rose a feeble .3% in February, only 1.3% above February last year. The weather argument does not hold. Measures of wholesale prices fell, as did consumer- and small-business confidence.
China and Russia drove long-term rates lower, more so than US data. Every new report from China shows slower growth as it tries to get credit under control and shift from excessive investment to a first-world economy. China continues to devalue the yuan, despite official protestations an obvious effort to boost its exports and counter Japan’s devaluation. The slowdown (also in Japan) hurts every economy in Asia, exports deflation to the West, and undermines Europe’s exports especially.
Russia… good heavens. Tsar Vladimir has turned a minor matter into something dangerous, and he is the sole cause. There is nothing of economic value to Russia in Ukraine. Russia could keep its naval base in Crimea undisturbed (see Russia’s Kaliningrad Military District, the enclave between Poland and Lithuania retained after 1989 Soviet bust-up). There is no popular push in Russia to retake old Tsarist/Soviet lands. This entire Ukraine grab is in the ego of Vladimir, the most dangerous of all sources of imperial adventure.
A great deal hangs on Vladimir’s actions after Sunday’s phony election in Crimea. The US and Europe appear to have drawn the line at Crimea, not allowing Vladimir even that snack, not waiting for a bigger grab in eastern Ukraine. Europe if anything is more firm than we are. Europe’s rationale for all the pain of the euro and unity is the determination never again to repeat the 19th and 20th centuries. They know Vladimir when they see him. They have seen his like many times.
Shooting war? No. Economic? Unless forces inside Russia pull Vladimir back, sanction-war will begin as soon as next week. Max Hastings has written the best new book on 1914, or pull out Barbara Tuchman’s classic, just the first few chapters of either. Conflict follows counterparties feeling wronged, each willing to bear sacrifice, each believing itself without options, each sure that it is tougher than the other.
From the scary to the knee-slapping ridiculous….
The White House and a bi-partisan group of senators have decided on a liquidation of Fannie and Freddie and a completely reconstituted US system of mortgage finance.
These are the same people who brought us ObamaCare and Dodd-Frank. Fear not: right-wing government-hating Republicans in the House will save us. Not because of fondness for Fannie, but because they hate Fannie worse than anybody and won’t allow government in any new system. A salvation deeply embarrassing to me, but given the fools in charge of this government, I’ll take anything.
Fannie since 1938 did get off-track, its semi-privatization a bad idea resulting in bloat and debt, but despite the worst financial disaster in US history has not cost the taxpayer a dime. The right says it hates these agencies because they pose a risk to the taxpayer. Aside from no loss, their beneficiaries are taxpayer-borrowers. The right’s real opposition rests on blind hatred of government, and wanting to be sure the wrong kind of people do not get loans. People not welcome at the country club.
Incredibly, this new legislation proposes semi-privatization worse than the old. “Fantasizes” is a better term. Instead of one issuer of MBS, several new mini-Fannies are supposed to spring up, take first loss on any loan, and government to guarantee the rest. If you don’t mind adding a couple of percent to mortgage rates (partly loss risk, partly a heterogeneous and illiquid fruitcake of new MBS), and consumers forced blindly into grab-bag underwriting, all a great idea. Mercifully DOA.
Friday, March 7, 2014
Capital Markets
By Louis S. Barnes Friday, March 7th, 2014
The first week of each month brings a blizzard of fresh data from the month immediately prior, and an even more blinding wave of contradictory analysis.
Except when the data reveal a big change in trend, the best way to evaluate the load: try to bracket the edges of the likely near future.
Before that, a word on Ukraine. From the markets’ perspective, Ukraine was a one-day tempest in a samovar. A hurricane in a Stoli shot. The western border of Russia is the farthest east it has been in 500 years. Kiev and most of Ukraine have been integral to Russia for that entire time and will remain so (far western Ukraine has been part of Poland as often as not). Suffering is native to Ukraine: see “Bloodlands.” We are in the 100th anniversary year of the most stupid conduct of international affairs in modern history, but it would require a near repeat to elevate Ukraine to global hazard.
Bracketing begins with jobs. BLS word this morning: we created 175,000 jobs in February, roughly as many as in December and January combined. Do I believe that? No, and neither do markets. That figure is about the same as the 12-month average, so set this bracket: whatever the job trend, it isn’t any better than this report. U-6 unemployment inclusive of “involuntary part time” did not change, still 7.2 million people, and the overall rate 12.6%.
One happy datum jumped prior brackets and bears watching: hourly earnings in February rose at a 4.4% annual pace, more than double the year-over-year figure. Rising income has been the essential missing piece in this recovery; however, to enjoy a higher wage requires a job. One unhappy report failed its prior bracket: the employment component of the ISM service-sector survey collapsed in February, from 56.4 to 47.5, the first sub-50 reading in two years, a further limit on today’s optimism.
Another positive change to watch: total bank credit in 2014 has grown consistently at 7.3% annualized, and the growth is in loans, not just securities. We’ve had the best 45 days of credit creation since a complete stall at the end of 2012.
Some credible chat from the Fed: NYFed’s Dudley expects future formal statements to abandon the unemployment rate as the dominant metric, switching to a basket of employment indicators. SFFed’s Williams, a growth booster, could see a Fed rate hike in mid-2015 if “everything moving in the right direction.”
Which it is not in two crucial places. Housing is flattening out nationwide under the weight of too-tight credit and too many still-damaged households (see “incomes” above). The distressed fruit has been plucked, and the huge theoretical pent-up demand by first-time buyers is frustrated by the job market and inability to raise a down payment. Housing is not pulling the economy, and it’s hard to see how it can sustain itself if interest rates rise more.
The second spot not moving properly is weird, solidly in careful-what-you-wish-for: inflation. Loons on the left, Krugmanites, still think inflation is a free lunch and should be run up to 4% or more. Crazy. However, inflation at 1% and slipping exposes an economy to any shock and means at least part of the economy is in deflation, paying back debt in more valuable dollars than the ones borrowed.
Fed and ECB leaders insist that inflation will soon move back up to the 2% target range. And have been dead, flat, wrong for three years. Going from 1% to 2% would not guarantee economic promised land, but sliding toward zero would be bad trouble. The ECB’s do-nothing Draghi is trying to make the problem disappear by re-definition: “Deflation is a self-reinforcing fall in prices that is broad-based across items and across countries.” Translation: so long as Germany is okay, allest ist gut.
The first week of each month brings a blizzard of fresh data from the month immediately prior, and an even more blinding wave of contradictory analysis.
Except when the data reveal a big change in trend, the best way to evaluate the load: try to bracket the edges of the likely near future.
Before that, a word on Ukraine. From the markets’ perspective, Ukraine was a one-day tempest in a samovar. A hurricane in a Stoli shot. The western border of Russia is the farthest east it has been in 500 years. Kiev and most of Ukraine have been integral to Russia for that entire time and will remain so (far western Ukraine has been part of Poland as often as not). Suffering is native to Ukraine: see “Bloodlands.” We are in the 100th anniversary year of the most stupid conduct of international affairs in modern history, but it would require a near repeat to elevate Ukraine to global hazard.
Bracketing begins with jobs. BLS word this morning: we created 175,000 jobs in February, roughly as many as in December and January combined. Do I believe that? No, and neither do markets. That figure is about the same as the 12-month average, so set this bracket: whatever the job trend, it isn’t any better than this report. U-6 unemployment inclusive of “involuntary part time” did not change, still 7.2 million people, and the overall rate 12.6%.
One happy datum jumped prior brackets and bears watching: hourly earnings in February rose at a 4.4% annual pace, more than double the year-over-year figure. Rising income has been the essential missing piece in this recovery; however, to enjoy a higher wage requires a job. One unhappy report failed its prior bracket: the employment component of the ISM service-sector survey collapsed in February, from 56.4 to 47.5, the first sub-50 reading in two years, a further limit on today’s optimism.
Another positive change to watch: total bank credit in 2014 has grown consistently at 7.3% annualized, and the growth is in loans, not just securities. We’ve had the best 45 days of credit creation since a complete stall at the end of 2012.
Some credible chat from the Fed: NYFed’s Dudley expects future formal statements to abandon the unemployment rate as the dominant metric, switching to a basket of employment indicators. SFFed’s Williams, a growth booster, could see a Fed rate hike in mid-2015 if “everything moving in the right direction.”
Which it is not in two crucial places. Housing is flattening out nationwide under the weight of too-tight credit and too many still-damaged households (see “incomes” above). The distressed fruit has been plucked, and the huge theoretical pent-up demand by first-time buyers is frustrated by the job market and inability to raise a down payment. Housing is not pulling the economy, and it’s hard to see how it can sustain itself if interest rates rise more.
The second spot not moving properly is weird, solidly in careful-what-you-wish-for: inflation. Loons on the left, Krugmanites, still think inflation is a free lunch and should be run up to 4% or more. Crazy. However, inflation at 1% and slipping exposes an economy to any shock and means at least part of the economy is in deflation, paying back debt in more valuable dollars than the ones borrowed.
Fed and ECB leaders insist that inflation will soon move back up to the 2% target range. And have been dead, flat, wrong for three years. Going from 1% to 2% would not guarantee economic promised land, but sliding toward zero would be bad trouble. The ECB’s do-nothing Draghi is trying to make the problem disappear by re-definition: “Deflation is a self-reinforcing fall in prices that is broad-based across items and across countries.” Translation: so long as Germany is okay, allest ist gut.
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