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The Market and Economy Are Strong Despite Housing
Tweet Share on Facebook December 17, 2007 CommentOutside of housing, the economy continues to boom—as does the stock market. Ed Yardeni of Oak Associates makes a great point:
It's been a great year for the stock market as long as you didn't own any stocks in commercial and investment banks, thrifts and mortgage companies, housing-related firms, retailers, autos, and publishers. Indeed, as long as you avoided falling into these sink holes, double-digit gains have been widespread: Energy (27.9% ytd), Materials (19.6), Utilities (17.0), Information Technology (15.5), Consumer Staples (12.5), Industrials (10.3). Telecommunication Services (8.8) and Health Care (6.8) have recorded healthy gains too. Only two sectors have had losses this year so far and they've been in the double-digits: Financials (-20.8%) and Consumer Discretionary (-13.6). ... Will it be so lopsided again in 2008? It probably will be through the first half of next year. But Financials and Consumer Discretionary could broaden out the bull market I foresee during the second half of the year as their earnings comparisons turn very positive. This assumes, as I do, that the recession scenario will become increasingly less likely after mid-2008.
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Stop the Credit Crunch, and Let the Economy Grow
Tweet Share on Facebook December 14, 2007 CommentThe Wall Street Journal and a good number of folks on Wall Street are coming to the realization that we're not in a recession, despite three years of housing turmoil and high gas prices and five months of credit market chaos. "Fourth Quarter GDP Back in the Black," is how the Journal puts it today as it notes Macroeconomic Advisers, Lehman Brothers, JP Morgan, and Morgan Stanley have all increased their forecasts for the current period by a percentage point or so. Yesterday's great retail sales news is a big reason for the renewed optimism. Now those firms are talking about growth in the roughly 1 to 1.5 percent range, hardly a boom to be sure. Yet the numbers do show the underlying strength in the American economy. We just need to get by this credit crisis. George Magnus, a senior economic adviser to UBS Investment Bank, put it well in yesterday's Financial Times:
What the financial system cannot deal with properly is a drying up of funding liquidity, reflected in exceptionally high interbank rates.... The longer this continues, the greater are the systemic and economic risks. Inflation risk is perhaps the main economic concern for central banks and investors. But whatever the inflation risks in the next few years, it seems unreal to worry about backward-looking food and energy price rises when a nasty deflationary credit crisis is just starting. No banking crisis has ever been followed by rising inflation (except the mid-1970s when oil prices quintupled). Core inflation in most countries remains tame and there has been little pass-through of prices from headline to core rates. Thanks mainly to globalisation, wage rises and pricing power remain subdued. As output growth slows in developed countries, commodity prices are likely to drop. ... As monetary policy must be forward-looking, it is appropriate to ease monetary conditions pre-emptively. This will not stop house prices and collateral values from falling. It can help, at the margin, to rebuild confidence and liquidity in the functioning of financial markets.
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Inflation Numbers Give Ammo to Gold Watchers
Tweet Share on Facebook December 14, 2007 Comment (13)Today's terrible inflation numbers—headline consumer prices jumped 0.8 percent in November, while the core rate (excluding food and energy) rose 0.3 percent—is sure to give comfort to those analysts who have been watching the price of gold and concluding that its ascent means higher prices are on the way. Other economists, though, think market-based measures such the difference between 10-year government bond yields and yields on inflation-indexed bonds are a better gauge of expectations. For a fair analysis of both positions, I urge you to check out this article written by my guy John Tamny, editor of RealClearMarkets, a sister site to RealClearPolitics. Although Tamny is a gold guy, he gives a good overview of the issue.
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Anti-Bernanke Sentiment Builds on Wall Street
Tweet Share on Facebook December 13, 2007 Comment (32)If there were a national election next year for Federal Reserve chairman as well as for president of the United States, Eric Rosengren might be the dark-horse candidate to become America's next banker-in-chief, a position currently held by Ben Bernanke. Who is Eric Rosengren? He's the president of the Federal Reserve Bank of Boston—he's been in the job only since July—and the lone member of the Fed's policymaking committee to vote for a half-percentage-point cut in the federal funds rate at this week's meeting.
At the very least, Rosengren would seem a lock to win the all-important Wall Street primary. The Dow Jones industrial average plunged nearly 300 points after the rest of the 10-member Federal Open Market Committee, including Bernanke, voted to chop just a quarter point from the key short-term interest rate, lowering it to 4.25 percent. Moreover, the FOMC lowered the discount rate—what the Fed charges banks to borrow—by a less-than-expected quarter point and put out a statement that still seemed to be as much about inflation as about economic growth and troubles in the corporate credit markets.
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Skimpy Fed Rate Cut Irks Stock Market
Tweet Share on Facebook December 11, 2007 Comment (29)My quick take on today's Fed rate cut: If Ben Bernanke ends up as a one-term Fed chief, this may have been the meeting that decided his fate. Not only did the Fed disappoint Wall Street with a quarter-percentage-point cut—and a particularly disappointingly meager cut in the discount rate— but its policy statement still seemed as worried about inflation as about economic growth. This was the statement from the Halloween Federal Open Market Committee meeting that unnerved the markets:
The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.
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Wall Street's Latest Take on 2008
Tweet Share on Facebook December 11, 2007 Comment (21)Greg Valliere, politics guru at the Stafford Group, an institutional research firm, gives his quick take on the 2008 candidates:
Sen. Hillary Clinton: She can't quite close the deal, and that must worry her handlers.... We think Clinton will win most of the Super Tuesday primaries and, like her husband, be called the comeback kid. But she's no Bill Clinton.
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Democrats Push for Temporary Tax Cuts, Spending to Boost Economy
Tweet Share on Facebook December 11, 2007 Comment (12)Time to prime the pump? Democrats sure think so. "There was an overwhelming consensus that the time has come to stimulate the economy" is what Barney Frank, chair of the House Financial Services Committee, told Bloomberg News yesterday. This stimulus would presumably be done through targeted tax cuts, tax rebates, or increased government spending. All temporary measures to give the economy a quick boost. All quaint throwbacks to old-fashioned, Keynesian, demand-side, "put money in people's pockets" thinking. And all unlikely to give the politicians the "bang for the buck" they might hope for. Here's the deal:
1) Back in 1957, Milton Friedman proposed something called the "permanent-income hypothesis," which said that people spend money based on what they consider their normal level of income and what they expect to earn over the long term. Short-term fluctuations in income, whether for better or worse, are smoothed out by more debt or less spending if consumers perceive the fluctuation as temporary. People adjust slowly to changes in income—just as the economy adjusts slowly to changes in Federal Reserve interest rate policy—which makes it tough for the government to fine-tune the economy. Short-term moves simply don't have the oomph policymakers expect, especially when the slow movement of legislation puts them out of step with the actual business cycle.
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Anger Over Bush Mortgage Plan Is Misplaced
Tweet Share on Facebook December 10, 2007 Comment (2)I am still getting E-mail from many of my readers (especially the more libertarian-inclined) moaning about the Bush-Paulson subprime mortgage plan. In short, they view it as unnecessary government meddling in the economy that will serve only to insulate dumb/greedy borrowers and dumb/greedy lenders from their financial follies. And to some degree, they are certainly correct. (Some even accuse the White House of "buying votes" for the GOP's 2008 hopefuls.) But to trot out the old Clinton campaign mantra, "It's the economy, stupid." The impact of the credit crunch goes beyond individual borrowers and lenders. Consider this on-point analysis from economist Jim Glassman of JPMorgan Chase:
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No Recession Here—Move Along, Please
Tweet Share on Facebook December 7, 2007 Comment (2)Bad Guy: "I thought you was dead?" Jacob McCandles (John Wayne): "Not hardly." That little exchange from one of my favorite films by the Duke, Big Jake, came to mind after I heard the new jobs numbers from the Labor Department. A solid 94,000 new jobs were created in November as average hourly earnings rose to $17.63, a 0.5 percent increase from the prior month—and the biggest monthly gain since June. Over the past 12 months, wages grew by 3.8 percent.
As Nigel Gault of Global Insight sums things up: "The jobs data is not flashing a recession warning." Nor were the recent ISM surveys of manufacturing and nonmanufacturing activity. And here is the kicker from John Ryding at Bear Stearns: "As an aside, we wonder if those economists who championed the household survey measure of employment as a sign that the economy is headed toward recession will draw attention to the strong 303,000 average increase in household employment [derived from talking to households rather than businesses] over the last three months." Is the economy dead? Not hardly.
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Bush Mortgage Fix Is Really an Insurance Policy
Tweet Share on Facebook December 7, 2007 Comment (18)"Philosophical debates are great for college campuses. In our universe, they are irrelevant. What counts is politics. In this case, doing nothing is not a political option for the administration. They had to do something." That's how Jaret Seiberg, analyst at the D.C.-based Stafford Group policy research firm, sees the Bush-Paulson subprime mortgage plan to avoid some 1.2 million foreclosures through 2009.
Now an economist might icily argue that when you consider that subprime mortgages make up just 6.5 percent of some 50 million mortgages outstanding in the United States—and only one-sixth of those are seriously delinquent—the market should be allowed to play out the consequences and correct itself. The "no bailout" crowd includes plenty of free-marketeers and diligent "I saved up for my 20 percent down payment" homeowners. Conservative commentator Michelle Malkin, for instance, calls the Bush plan—and the even more ambitious plans offered by Democrats—big-government "Hillarycare for housing" and "a perversion of the American dream."
