E-piphany

Sometimes, it’s hard to find anything to write about. Other times, it’s hard to narrow it down.

I suppose I should take administrative note of the fact that Housing Starts (and Permits) fell much more than expected; ‘Starts are back under a 600k pace again. While one month isn’t a calamity, in this case a one-month wiggle earns more attention than usual since it correlates with the end of the tax credits for new home buyers. Because of this, we might ascribe a little more information to the wiggle than we otherwise would.

I could note the downbeat Fedex outlook and lower Nokia forecast and point out that the stock market continues to be somewhat richly-valued if analyst forecasts are correct…but if those forecasts are too high, then stocks are quite a bit rich.

It would seem the news that Bill Gates and Warren Buffett are asking billionaires to give at least half of their net worth to charity is ripe for a snide comment…but there’s no time today.

Topical, considering the European crisis, is the fact that Sweden was unable to place its entire government debt auction today, selling only 675mm kronor rather than the 1bln kronor they wished to. And this is despite the fact that Sweden is a comparatively healthy borrower.

But I know that today I absolutely must respond to the ridiculous article by Alan Blinder in today’s Wall Street Journal (link). You may recall Blinder as the idiot who presented a paper at the 2005 Fed conference at Jackson Hole, praising the Greenspan legacy and lamenting only the fact that the “secret formula” wasn’t available to other central bankers. His latest kiss-up article attempts to absolve President Obama’s economic policies. For the record, 64% of Americans think the Administration’s policies have either made things worse or had no impact. 53% still say the auto bailout was a bad idea (link). 58% still favor repeal of the health care bill (link). But according to Blinder, these people are wrong. “…to say that the president’s policies either had no effect or were harmful flies in the face of both logic and fact.”

Let’s start with two indisputable facts. First, both the financial system and the economy are in far better shape today than they were in the dark days of January or February 2009. For example, even though unemployment is higher now, it is receding rather than soaring, dropping to 9.7% in May from 9.9% in April. Second, the growth of the U.S. economy over, say, the last 12-18 months beat virtually every forecast made back then. I know, because I stuck my neck out on this page with a forecast viewed as too optimistic in July 2009, and the U.S. economy did better than I predicted.

Of course, that does not prove that the president’s policies caused the unexpected improvement. Maybe our luck just turned, and the economy would have done even better under a laissez-faire approach. (A few diehards still argue that FDR’s policies worsened the Great Depression!)

Well, since we’re talking about facts, it is worth recalling that the “diehards” who are “still arguing” that FDR’s policies worsened the Great Depression haven’t exactly been arguing that for 80 years. It is in fact only a comparatively recent development that thoughtful observers have criticized the spastic legislative agenda of FDR, and quite recent indeed that this thought has begun to move into the mainstream via books like, for example, Amity Shlaes’ The Forgotten Man: A New History of the Great Depression.

But more importantly, Blinder is confused about the “fact” that the economy is showing “unexpected improvement.” About the only thing unexpected about the improvement in the GDP numbers is that it appears to be entirely due to deficit spending, and that almost no improvement in the private economy has been seen. Even the most jaded observers, who recognize that deficit spending only serves to pull future demand forward, expected to see at least some associated improvement from the private sector, and this hasn’t happened. Instead, as has been widely reported the recent improvement in Payrolls was about 95% Census workers.

Moreover, at least some of the rebound since Lehman ought to be attributed to the simple fact that the Lehman/AIG/FNM/FRE/Merrill collapse created a very easy comparison. As I have written several times, Initial Claims are now just about exactly where they were prior to Lehman (see Chart below, source Bloomberg). That is: any improvement that has been seen from the Lehman lows only looks like improvement because the initial dip was so deep. Did Administration policies save us from an implosion at that point? If so, it should not be attributed to this Administration, which wasn’t in office yet. But Blinder is arguing something stronger, that Obama policies did not merely stem the tide but have actually improved things. There is virtually zero evidence for that proposition, unless and only unless you take raw government spending as “growth.”

What improvement? We've gone nowhere since Lehman.

But the dingbat doesn’t stop there: Blinder notes that the $400bln that TARP disbursed to the banks and auto companies have been mostly paid back, with interest, so that the total costs are “only” $100bln. Well, that sounds terrific…except that he conveniently ignores the open-ended commitment to the GSEs, with some estimates (from Barclays Capital and Egan-Jones, respectively) putting a price tag of $500bln or $1trillion on that commitment.

“I come,” says Blinder, “finally, to the third major landmark:”

…the “stress tests” of 19 big financial institutions (not all of which were banks) conducted by the Federal Reserve and other banking agencies in the spring of 2009. This unheralded but ingenious policy initiative was a riverboat gamble that paid off big.

This is true. There was a huge gamble that the Administration was taking that investors would pretend to believe the results of the ridiculous “stress tests” that everyone, everyone knew were designed to be passed easily. Recall that the “worst case” stress test involved an assumption for the Unemployment Rate that not only was substantially below what was actually subsequently realized, but was also substantially below what many private forecasters were forecasting as the median case! It was a bogus show, and the gamble was that investors would pretend that it was valid.

They didn’t, but the market eventually bounced and rallied anyway because of the usual things: valuation (on the bounce), and excessive liquidity (on the overextended rally). And now, the Administration’s lackeys and those who aspire to be Administration lackeys are trying to take credit.

None of this has anything to do with good policy by the Administration. But all that means is that it creates an opportunity for Blinder’s next article: fawning, I am sure, over Ben Bernanke.

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Now that I have that off my chest, I can calmly report that the bond market (represented as usual by the September TNote contract) gained 5.5/32nds with the 10y yield down to 3.28%. Stocks chopped lethargically to a roughly unchanged close, on continued light volume.

Tomorrow, we finally get a bunch of economic data. In addition to the weekly Initial Claims data (Consensus: 450k from 456k), the BLS releases the monthly CPI figures (Consensus: -0.2% headline, +0.1% ex-food-and-energy). Last month’s negative core print was difficult psychologically for the market and led a multi-day beat-down of the TIPS curve, especially the front end (ironic, since core inflation has the least relevance for the front end). Another negative print would be devastating, but even the +0.1% anticipated on core would only serve to hold the year-on-year rise in the core rate at +0.9%. I think that’s about right, although we may have another tenth or two decline into Q3 and early Q4 before the bottom. So far, it’s playing to form and tracking the models. Recently, even core inflation ex-housing has been more well-behaved, although hardly at a level one would consider soothing. I will be especially attentive to a further ebb in that metric, which will continue to be the one to watch over the next year or so until prices in the housing market stabilize and this is transmitted to the behavior of rents. With a sizable overhang of properties on the market, housing might continue to artificially dampen inflation readings for a while, though.

Also out is the Philly Fed index (Consensus: 20.0 from 21.4), which I think has the potential for a deeper pull-back, and Leading Indicators (Consensus: +0.4% vs -0.1%) about which I care not in the slightest.