It's Still The Economy, Stupid

Friday, August 01, 2003  

Good News, Right?

On the wire: "The Labor Department reported the nation's unemployment rate declined to 6.2 percent in July from 6.4 percent in the previous month." But before you get excited, read the next sentence:

The figure was slightly better than analysts' estimates, but much of the drop came from 470,000 disenchanted people who abandoned job searches.
Remember that the unemployment rate is computed as
(# people actively seeking work)/(#people in the labor force),
so when would-be workers get discouraged and stop looking for a job, they are not counted as part of the labor force and the measured unemployment rate falls.


posted by Angry Bear | 1:41 PM |

Uh, oh.

The big jump in interest rates has cold-cocked the interest rate swaps market.

As a primer on why swaps (a type of derivative) exist, a mortgage lender typically borrows for a shorter duration than they lend. They thus expose themselves to changes in the interest rates before the loans come due, because they lend at a 30-year fixed rate and borrow at a rate that will vary as they roll over their debt (for example, selling 2-year bonds to buy 30-year mortgages. The swaps market allows lenders to exchange the terms on their loans in order to optimize the duration (time until maturity) on their debts, or to swap a fixed rate loan for a variable rate loan, and reduce the risk of being stuck borrowing at higher rates than one is lending at.

While the market for interest rate swaps is very big (in the $trillions), it still is based on expectations for the future, and even though lenders try to hedge themselves against unwelcome changes in interest rates, they can't hedge themselves perfectly or they won't make any money. The biggest losses occur due an abrupt change in trend of significant magnitude that lasts for an extended period of time. Compounding the problem is that in big reversals, the lenders most exposed rush to cover their positions, which amplifies the volatility.

Thanks to the housing bubble, mortgage volume got so huge that swap spreads shrunk precipitously. Typically in the 50-75 basis point (a basis point is 0.01%) range, the "dollar-swap" spread shrunk down to the low 20's and thanks to the big jump in interest rates has exploded back into the low 60's. In the mortgage universe, lenders are often incredibly leveraged (Fannie Mae and Freddie Mac have loans to equity around 100 to 1), and insurers are even more heavily leveraged (Ambac and MBIA have covered loans to equity of several hundred to one), so this move has the potential to wipe people completely out. Freddie Mac is probably the most exposed, since they have made the largest profits of the government sponsored mortgage companies in recent years as mortgage rates fell. Stay tuned.

For a fascinating read on how these derivatives wiped out over $1 trillion from Long Term Capital Management (a hedge fund run by three Economics Nobel Prize winners) in less than three months, read Roger Lowenstein's classic, When Genius Failed.

posted by Teddy | 8:06 AM |

Thursday, July 31, 2003  

Juicing the Growth Rate

General Glut makes an interesting point here: by the General's calculations, without the extra $40 billion in military spending, the projected growth rate for this year would be under 1%.


posted by Angry Bear | 12:26 PM |

Echoes of 1987

Peter Brimelow writes a newsletter and research summary on CBS Marketwatch. This installment finds him catching quite a buzz from a lot of analysts that market conditions - rising interest rates while stocks are locked in a trading range where only speculative issues are gaining - feels a lot like the summer of 1987. For those of you not around then, the market finished that summer with a bang, a drop in September culminating with a 20% crash in October that wiped out a third of the value of the Dow Jones Industrial Average.

Add to this the the return of day traders, a recent peak in insider selling, and as I mentioned in a earlier post, economic data that makes the economy look much better than the underlying fundamentals. It sure looks like the stock market is setting itself up for a nasty shock if the imminent recovery does not materialize. Stay tuned.

posted by Teddy | 9:55 AM |

People are too focused on the little events in the stream, this is because most activity seems to follow from sparks that turn into a firestorm of emails, letters and coverage. Most people, attracted to those sparks seek to generate them, and think that is the way things get done. This, is a mistake. Economics moves in longer cycles, and is controlled by the flows of liquidity, demographics and demand. These make up the forest. Without these being dry, and there being fresh tnder around, there is no fire possible, no matter how many sparks are made. This is why activism is hit or miss, and seems to work so well sometimes, and not others.

The reason traction has started to happen against the Executive is that a long jobs drought has finally burned through almost all of the equity people could draw out of their houses, and savings exhausted, they finally are giving up that things will get better. But these conditions didn't just happen - the government has a monopoly on the flow of money, and the timing has always been in the cards. Remember how there were jobs stimulus bills floating around Congress in the days after 911? Remember how a glowering Greenspan warning against them? Remember how interest rates were not cut quickly?

Today's GDP figures came as a shock to many. They should not have. First, they are overstated, just as 3 quarters in 2001, 2 in 2002 and the first quarter of 2003 were overstated on first announcement - by an average of .3% annualized. Given this, a more likely number for the second quarter is 2.0% which is a terrible growth rate for a war time economy that is borrowing nearly 6% of GDP through government sources. To put it another way - if the economy grows at 2% this year, and has borrowed 6% of the total, we would have been shrinking by nearly 5% without the direct results of the borrowing.

Back in the winter a few people associated with the Executive let the cat out of the bag: the jobs recovery takes a year before people feel it is real. So it had to happen this year. This, not any other reason, is why Iraq had to happen this year - because if it had been delayed another year, then we would be having the 2004 campaign in a sluggish economy with questions proliferating about how the invasion was rationalized, and how it seems we had no plan for rebuilding Iraq.

In otherwords, by controlling three simple variables - fiscal policy, monetary policy, and the timing of Iraq, the Executive is trying to - and has admitted to this - ride a wave into a second term. The plan, all along, was Reagan Redux: borrow a metric ton of money, look tough on foreign policy and tell Americans starved for any good news that it is Morning in America. What Americans did not realize in 1984 was that the Reagan expansion was already more than half over by Inauguration day 1985, that the Market was almost at its peak, that the debt was piling up more and more as an overpriced dollar was propped by high federal interest rates: and that this was already placing strains on the financial system which would become the budget and S&L crisis of the early 1990's.

This has been obvious from day one: the Executive has to borrow to get past 2004, and then can lock down tax cuts forever, under the assumption that when the fiscal cascade hits - which according to the Concord Coalitions conservative estimates is 2007 - it will be too late to do anything but engage in a massive austerity budget - slashing Social Security, Medicaid, Medicare, employment protection and the rest of the safety net. America will be locked into an IMF-like cycle of slashing budgets, seeing economic contraction, and then having to slash budgets again, all in the name of making sure the rich don't engage in capital flight.

The bubble of 1997-2000 should have taught people the lesson of debt: that borrowing pyramids seem to go on forever, until they stop. For short periods of time, they smash any rational expectations, and then just as suddenly stop. This same cycle is now being followed with the housing market - in hopes of "Japanifying" the US economy - stagnant growth, low mobility, but without social unrest, leaving the same people in charge as before. America, however is younger, more dynamic, and more dependent on immigration. A stagnant US will not attract top talent, it will not lead in capital formation, and therefore housing and stock prices which are built on the assumption that the top 1% of the people in the world will come to the US to form companies cannot be maintained.

The basis of this plan was always outlined by the Project for the New American Century: in order to prop up the Dollar, the US has to use its status as a superpower to enforce a colonial rule on oil producing countries, because it is oil that is the bottleneck commodity, and has been since the Embargo in the early 1970's. It has to use this as a means of bending other nations to support the US economy, so that the US economy can provide a military machine that "protects the world". In the absence of a Soviet threat, terrorism and middle east instabilities were to be that raison d'etre, where the US would go in and get the gain, and then go to the UN to pay for the pain. The key is that without Sovietism, the US is not really threatened, and therefore there is no reason to have social programs or other forms of nation unifying government projects. This was explained in Phillip Bobbitt's The Shield of Achilles which deftly argues the case that, in the New World Order, "you on yo own." Never mind the large gaps in the argument - it is the thrust which is important.

The problem is that this rationalization is not selling. The realization abroad is that terrorism is not a military problem, but a law enforcement one, it is not a physical enemy based on a state, but, like narcoterrorism and adamantoterrorism , a criminal empire that leeches resources out of the poorest parts of the world and concentrates it on violence designed to produce revenues in the richest parts of the world. This triad - narcotics, diamonds and oil - accounts for the vast majority of terrorism around the world. As Europe increasingly dealigns from the idea that a huge US military machine is necessary for their protection, and realizes that the US domestic market is no longer going to be a target for their goods, they are beginning to alter their internal economic structure to move away from an Amerocentric structure.

Without the influx of cash from Europe, and with the MiddleEast turning from profitable oil cow to a bloodsink - the basic inputs for a permenant Republican state in the US are falling apart. This means that while short term borrowing - over a trillion in the last 12 months - will produce short term economic stimulus, as any good Keynesian would expect - the long term is much bleaker. This is because how one spends the money matters. In FDR's New Deal and WWII programs - money was borrowed by the government, and lent. The Federal government was a net creditor to the US economy for decades. This meant that, gradually, much of what was spent was returned to the federal coffers.

The current economic regime is to borrow money, and then give it away. Instead of requiring that the US government get stock for its bailout of the major airlines, or treated the money as a loan, there were a series of outright grants. Huge welfare checks to keep the major airlines in business without any corresponding responsibility or accountability. This means that this stimulus, far from being Keynesian pump priming, is a direct trade of future economic activity for current economic activity, and further pumps up already inflated investment demand.

Without the cash flow from European and MiddleEastern investors, this regime is unsustainable, and without new sources of demand, the consumer spending side of the equation is unsustainable. Without consumer demand, Europe and Japan no longer have incentives to finance our budget deficit, because they make their money currently selling to US consumers. No consumers, and they are not bound to the US.

For those that follow economic history, the bubble of 2000 and the new bubble now being formed globally by borrowing resemble the twin bubbles which occured in 1901 and then in 1906 - where the solution to one bubble was an arms race and the escalation of colonial wars to grab resource. From in the 1899-1907 period there were wars over South Africa, colonial conflicts between the US and Spain, the Russo-Japanese War and rising tensions between Germany and Britain over equatorial Africa. The result had Europe stumbling on towards its first full scale conflict in a century.

And this is why, ultimately, history is against the current economic regime and the Republican Party that hopes to enact it. In the end money is based on promises, and the Republican government in power now is making promises that the next generation will not feel particularly obliged to keep, because the cost of general economic collapse is far higher now, and events will not be allowed to get anywhere near the level of tension that had Frenchmen happily marching off to war in a naive spring of 1913. By far the most likely scenario is the ending of the supply of credit, coupled with increasing tension in the "middle sphere" of countries that have developed industrialized bases, but not sufficient liquidity - Argentina, Taiwan, Korea, Brazil, Venezuela, Indonesia all have capital assets in their urban cores which are at world standards, but not enough of an internal market to sustain the growth of those assets.

And it is thinking ahead which is what people in the internet blog space should be doing. We have limited impact on immediate events, though more and more every day, instead it is the long term where the intellectual power of the internet space is most important - taking arcane predictions from economics papers, and explaining in clear detail what projects mean.

posted by Anonymous | 8:30 AM |

GDP advance estimate for 2nd quarter 2003

The economy grew at a 2.4% annual rate in the 2nd quarter of 2003. While this was greater than the 1.5-2.0% that economists had forecast, the economy continues to experience very uneven growth driven by discounting and defense spending rather than more sustainable factors.

Personal consumption expenditures contributed 2.34% to economic growth in the second quarter 2003. The majority of the spending was in consumer durable goods, which rose at a 22.6% annual rate, and the biggest chunk of that was in motor vehicles and parts (up $27.9 billion to $402.8 billion). This is the fourth double-digit increase in durable goods consumption since the slowdown began (+11.5% in 1Q01, +33.6% in 4Q01, and +22.8% in 3Q02). These big jumps have been correlated with significant declines in interest rates and increased mortgage refinancing, which has allowed consumers to extract their home equity to buy big ticket items like automobiles. None of the previous increases have been sustainable and based on the reported profits for domestic automakers this quarter, as well as the recent jump in interest rates, this quarter's boost should turn out no differently. Durable goods consumption is one of the more heavily revised components of GDP, so we should pay attention to the revisions in manufacturing sales and orders in the next couple months.

Business investment was positive for only the second time in the last 11 quarters. While this is a positive sign, the increase was not terribly significant (about +.6 contribution to growth). The outlook that businesses are giving for sales have been mixed to poor, so it would be unwise to take this one data point and extrapolate a recovery out of it.

Government spending was the other major contributor to GDP growth in the second quarter. The big jump was undoubtedly due to the campaign in Iraq. Defense spending in the second quarter rose at a 44.1% annual rate and contributed 1.6% to GDP growth. Non-defense federal spending fell at a 4.1% annual rate and state and local government spending fell at a 1.5% annual rate. While the Iraq campaign continues, defense spending will support output but not growth. We would need to see a significant acceleration of spending on Iraq or an Iran/Syria campaign to generate the same growth in the third quarter.

Given that consumer durable goods spending and defense spending contributed 3.37% to GDP growth in the second quarter, while the rest of the economy actually shrunk by 1%, it's really difficult to see any acceleration of growth in the second half of the year. While economists will no doubt try to extrapolate the overall GDP growth number to justify their second-half forecasts, digging into the details unearths nothing that would indicate today's number is a sustainable trend. Now that the Iraq campaign is over and interest rates have choked off the refinancing boom, we will need other sectors of the economy to increase even more to compensate for these components returning to their previous trends. In fact, if consumers don't spend nearly all of Bush's tax cuts and employment doesn't pick up significantly, we may even see the "double-dip" recession warnings re-appear in the third quarter.

posted by Teddy | 8:14 AM |

Wednesday, July 30, 2003  

Bush on the Economy

George Bush gave one of his infrequent press conferences today. In it, he was asked several questions about the economy and the Administration's economic policy. My comments below his.

Q: Thank you, sir. Since taking office you signed into law three major tax cuts -- two of which have had plenty of time to take effect, the third of which, as you pointed out earlier, is taking effect now. Yet, the unemployment rate has continued rising. We now have more evidence of a massive budget deficit that taxpayers are going to be paying off for years or decades to come; the economy continues to shed jobs. What evidence can you point to that tax cuts, at least of the variety that you have supported, are really working to help this economy? And do you need to be thinking about some other approach?

THE PRESIDENT: Yes. No, to answer the last part of your question. First of all, let me -- just a quick history, recent history. The stock market started to decline in March of 2000. Then the first quarter of 2001 was a recession. And then we got attacked in 9/11. And then corporate scandals started to bubble up to the surface, which created a -- a lack of confidence in the system. And then we had the drumbeat to war. Remember on our TV screens -- I'm not suggesting which network did this -- but it said, "March to War," every day from last summer until the spring -- "March to War, March to War." That's not a very conducive environment for people to take risk, when they hear, "March to War" all the time.

And yet our economy is growing. In other words, what I'm telling you is, is that we had a lot of obstacles to overcome. The '01 tax cuts affected the recession this way, it was a shallow recession. That's positive, because I care about people being able to find a job. Someone said, well, maybe the recession should have been deeper in order for the rebound to be quicker. My attitude is, a deeper recession means more people would have been hurt. And I view the actions we've taken as a jobs program, job creation program.

Secondly, there are hopeful signs. I mean, most economists believe that over the next 18 months we'll see positive economic growth. Interest rates are low; housing starts are strong; manufacturing indexes are improving.

There are other things we can do in Washington. As I said, we need an energy bill. We certainly need tort reform. I think the class action reform that's moved out of the House and into the Senate is something can be done, and it ought to be done quickly. In other words, what I'm saying to you is, is that there's still work to do. But I'm optimistic about the future, and I believe you'll see more jobs created, and that's going to be good for the country.

Here the question was whether he felt his tax cuts were working to help the economy. Bush's answer, pieced together out of the 95% of his reply that was irrelevant, was that the recession would have been worse without the tax cuts. This is not correct, since his tax cuts were enacted in response to the recession. The tax rebate checks, actually an advance on tax cuts that would not become effective until 2002, were mailed between the end of July and the end of September 2001, well after the recession began and certainly had little effect on the recession the NBER recently declared was over that November. Since Bush wastes a lot of time in his response discussing NBER and the timing of the recession, maybe we should ask the NBER the same question Bush didn't really answer: what was the effectiveness of the tax cuts? Answer: not much. I might also add that since Bush viewed the tax cuts as a "job creation program", 1 million of the 2.5 million jobs lost since February 2001 were after the recession had ended. The unfortunate part is that according to Dubya, tax cuts are the only method they will consider to stimulate the economy.

Q: Thank you, Mr. President. As you said just a few moments ago, and say frequently in your speeches, the deficit was caused variously by the war, by recession, by corporate scandals, the 9/11 attacks. But just a couple of weeks ago, on July 15th, the Office of Management and Budget put out a report saying that without the tax cuts that Congress passed, the budget would be back in surplus by 2008, but with those tax cuts factored in, we have deficits that year and further years out of at least $200 billion -- to use the phrase, as far as the eye can see. Aren't tax cuts in part responsible for the deficits, and does fact concern you? Are we now in a period where we have deficits as far as the eye can see?

THE PRESIDENT: We would have had deficits with or without tax cuts, for this reason: The slowdown in the economy, the decline in the stock market starting March of 2000, plus the recession, reduced the amount of revenues coming into the federal treasury. Secondly, we spent money on the war. And we spent money on homeland security. My attitude is, if we're going to put our troops into harm's way, they must have the very best. And there's no doubt we increased our budgets on defense and homeland security. So there would be recessions.

And so, given the -- I mean, there would be deficits. So given the fact that we're in a recession, which had it gone on longer than it did could have caused even more revenues to be lost to the treasury, I had a policy decision to make. And I made the decision to address the recession by a tax cut. And so part of the deficit, no question, was caused by taxes. About 25 percent of the deficit. The other 75 -- 50 percent caused by lack of revenues and 25 percent caused by additional spending on the war on terror.

Now, we have laid out a plan which shows that the deficit will be cut in half over the next five years. And that's good progress toward deficit reduction. That's assuming Congress holds the line on spending. I presented them with a 4-percent increase in the discretionary budget, to help them hold the line on spending. They passed the budget. Now they've got to meet the budget in their appropriations process.

My first concern, Dick, was for those folks who couldn't find a job. And I addressed unemployment and addressed economic stagnancy with a tax cut that affected growth -- or the lack of growth -- in a positive way. And I'm optimistic about our economy. But I'm not going to stop working until people can find a job who are looking for work.

Bush really shouldn't take credit for "a plan to cut the deficit in half by 2008". This appears to actually be the CBO's budget outlook for 2004-2013, which has nothing at all to do with anything the President and his advisors have "planned", except that CBO incorporated the provisions of the recent tax cuts through 2010. In fact, the biggest improvement in the budget situation will come in 2011, when the largest chunk of these tax provisions theoretically "expire". Additionally, the CBO projections anticipate significant GDP growth every year through 2008 on the order of 4-5%, in order to see the baseline deficit of $168 billion. As with the first question, Bush spends most of his time covering the irrelevant topic of what portion of the deficit was due to what cause, rather than addressing the question of "budget deficits through the foreseeable future".

Q: Thank you, Mr. President. Staying with that theme, although there are some signs of improvement in the economy, there are sectors in the work force who feel like they're being left behind. They're concerned about jobs going overseas, that technology is taking over jobs. And these people are finding difficulty finding work. And although you're recommitted yourself to your tax cut policy, do you have any ideas or any plans within the administration of what you might do for these people who feel like there are fundamental changes happening in the work force and in the economy?

THE PRESIDENT: Sure. Listen, I fully understand what you're saying. In other words, as technology races through the economy, a lot of times worker skills don't keep up with technological change. And that's a significant issue that we've got to address in the country.

I think my idea of reemployment accounts makes a lot of sense. In essence, it says that you get $3,000 from the federal government to help you with training, day care, transportation, perhaps moving to another city. And if, within a period of time, you're able to find a job, you keep the balance as a reemployment bonus.

I know the community colleges provide a very important role in worker training, worker retraining. I look forward to working with our community colleges through the Department of Education, coordinate closely with states, particularly in those states in which technology is changing the nature of the job force.

I've always found the community college -- and this is from my days as the governor of Texas -- found the community college to be a very appropriate place for job training programs because they're more adaptable, their curriculums are easier to change, they're accessible. Community colleges are all over the place.

And -- but you're right. I mean, I think we need to make sure that people get the training necessary to keep up with the nature of the jobs, as jobs change.

While the "reemployment account" sparks the imagination, $3000 to every single one of the 9.3 million would amound to (if my math is correct) about $27.9 billion, or a little less than 1/3 of what we've already spent on Iraq. There's also the back of the envelope speculation of the adequacy of $3000 to actually retrain someone who has lost their job. Day care expenses in my neck of the woods will run $700-$1000 per month. And while community colleges might be everywhere, they ain't getting any better or cheaper under Bush.Nor is the cost of getting there. Moreover, does the fact that this is an "account" and not a "grant" or "appropriation" seem like the actual funding of this account may not actually be done by the government?

Overall, the President sounded like he's already campaigning. Lots of solutions but no specifics. Nearly all his statements on his administration's economic policies did not make sense or were not accurate. The reemployment account sounds like something Karl Rove pulled out of his ass last night around 1am and told George to mention during his speech. Bush might get a free pass due to some positive economic data and his most recent tax cuts just going into effect. He will be less lucky near the end of this year if (as I expect) there is relatively little growth and no gains in employment.

posted by Teddy | 1:38 PM |

No raise for you! One year!

This should not be much of a surprise to those of us that are lucky enough to still have a job. Fortunately, there's no inflation.

posted by Teddy | 6:46 AM |

The Maestro off his game?

Some economists beg to differ Alan's assessment of consumer finances. On - gasp - CNN Money, no less!

posted by Teddy | 6:31 AM |

Tuesday, July 29, 2003  

The Deus Ex Machina Recovery

The biggest danger to the economy today is rising interest rates. So far, the resilient consumer has been able to spend beyond their means by a combination of rapidly increasing asset prices (first stocks, now housing) and two decades of steadily declining interest rates. Despite the highest debt levels in history, consumers are actually paying smaller monthly payments thanks to the lowest borrowing rates in nearly 50 years.

The bubble in treasury bonds, which has been a major contributor to lower interest rates across the board, seems to have burst. After a final melt-up (or melt-down, if you use yields) in bond prices, from a yield of 4.1% at the start of 2003 to 3.07% in mid-June, the market snapped back violently. In the period of one month, the 10-year treasury yield has jumped to 4.28%. Other interest rates have backed up accordingly. Freddie Mac's average 30-year mortgage rate has jumped from 5.21% to 5.94%, this will likely top 6% when updated Thursday. Ten-year AAA corporate borrowing rates have jumped from 4.51% to 5.3%.

The mortgage refinancing boom has not quite ended despite higher interest rates. Borrowers across the board are rushing to refinance before rates rise further. MBAA's refinancing index was over 6000 in the past week. The index was under 1000 for much of 2002. High-risk borrowers, which have seen risk premiums collapse as the stock market rallied and the Fed added liquidity, are especially keen to borrow now.

But all of this will soon end if rates remain high. The Fed estimates that $200 billion was extracted in 2002 from home equity. Since undoubtedly nearly all of this was spent, the economy will no longer benefit from this additional consumption when the refinancing boom ends. And if rates remain high, borrowers will eventually have to make higher monthly payments when they roll over existing debts.

While the end of the refinancing boom is not an "economy killer", it will be a significant drag on an economy that is generating hefty expectations for the near future. Paul Kasriel and his Northern Trust economic team are forecasting 3.6% growth for the third-quarter 2003, and 3.5%, 3.7% and 3.5% growth rates for the subsequent three quarters. This is pretty typical of economists' expectations for the next year. A good chunk of this forecast is based on a resurgence in employment and business investment, things which have been often predicted yet rarely experienced since our economic struggles began three years ago.

This recovery had better show up pretty quick. During this recession, or whatever you call it, the standard operating procedure for pension programs, state and federal budget offices, individuals planning retirement, Social Security administrators and their ilk, has been to postpone the exponentially growing gap between commitments and funding in expectation of a resurgent economy and equities market healing all wounds. The longer we wait, the bigger this gap becomes. And since we need to eliminate the funding gap, the longer we wait for recovery, the greater the amount of that recovery needs to be.

High GDP growth rates are going to be difficult to obtain if a drag on consumption is added to a refusal to invest or employ, and economic agents have to start diverting income to honor their future commitments. We're also going to need a bit more than a one month or one quarter blip in the economic data to indicate that a recovery is occurring. If employment jumps, we'd better see an increase in profits (actual GDP profits, not what companies report to the SEC) and an increase in capital investment to verify that the increase employment is permanent. A big jump in durable goods orders is nice, but in the context of very low capacity utilization it's not going to have much carry over to employment or prices.

Like the economic promises of the Bush Administration, economic forecasts have recently been all talk and no execution. They're also bogged down by their own structural contradictions. We apparently want businesses to invest and employ without profits, for consumers to spend more without income, and for deficits to disappear without increasing taxes or cutting spending.

In a couple months, the refinancing boom will peter out. Something needs to replace the income the boom generated. It could either be more home equity loans, increasing capital, investment or government spending, or reducing our trade deficit. Whether one looks at the current indebtedness of the consumer or their near-term employment prospects, a surplus of production and a shortfall of profits, ballooning federal and state budget deficits, or the steady shift of manufacturing output abroad, none of these sectors of the economy seem to show anything resembling pent-up demand which would generate the economic growth being predicted for the near future. The new engine of economic growth is apparently supposed to materialize out of the blue.

posted by Teddy | 12:37 PM |

Traders Not Liking Deficits

James Cramer, a pretty good proxy of a Clinton Democrat turned Bush Republican, had this to say about the current debt level:

Only the bond market can derail the stock market. But that "only" shouldn't be underestimated. I blanched yesterday when I saw the schedule of Treasury offerings. It reminds me of the old days under President Bush Sr., before Bob Rubin, when the Treasury schedule was run by people who aided and abetted a bad stock market.

There's too much supply, obviously. It doesn't take a genius to see it, courtesy of the gigantic and unlimited spending by the president, who has vetoed nothing having to do with spending.

That was fine when I thought the economy was going to collapse. I no longer think that. In fact, I now look at new tax breaks, like the one that Congressman Thomas proposed, and I have to say to myself, do they want to kill the bull in Washington? Do they want to present such grisly and grizzly competition that we don't need to be in stocks while we can make so much money in bonds?

Understand the tug-of-war here. A slow, gradual lift in yields is just fine. It's consistent with my Dow 10,000 thesis. But a jaunt, or a sprint, to north of 5% for the 10-year would not be in keeping with my thesis. It would kill the thesis.

Cramer doesn't seem to understand who this President is. He thinks that the borrowing is just due to recession or that it's not really important, except when it is. And now it's crimping interest rates and starting to impact his world of high-flying equities. In other words, I miss Bob Rubin.

posted by Matthew | 6:24 AM |

Monday, July 28, 2003  

I've been really remiss about posting over here, as I've been just trying to get past the Blogathon and setting up a few other groups blogs. But now I have no such excuses, and although still somewhat sleep-deprived, I wanted to initiate some discussion over here on the state of the recovery.

This morning, over at Wampum, I expressed some concern regarding two factors, state budget deficits and spiking natural gas prices, which I think may have an impact upon the strength, or even the existence, of the pending economic recovery. I expect that others out there have additional concerns. This weekend, while digging back in the 1991 archives, I noticed a lot of blame being directed at the purported tight lending environment, and I recall Matt S. asserting a similar argument in my old Wampum comments many months back.

Anyone care to add issues the think may derail the recovery, as well as ways the current administration, or a future Democratic one, may avert such a problem?

posted by MB | 8:04 AM |