Okay so I'm remiss not to have posted in almost a month, but frankly not a lot has changed - we're still on a bumpy path sideways, and that's to be expected. It fits the fundamentals and the fundamentals, while they could have shifted, they haven't. There's nothing really new going on, and that includes continued volatility from which everyone should be making money, upward and downward.
Yesterday, September 6th, everyone was freaking out about uncertainty in Europe. Today Germany's courts have approved a system wherein Germany can participate more freely in EU bailouts (hello Greece). But has there ever been doubt that a bailout or series of bailouts are going to happen? Is there doubt that there will be some kind of managed Greek default? How substantially different are those things? These are questions answerable a month ago. From Reuters:
European stocks bounced back from a two-year low after the court rejected lawsuits aimed at blocking the country's participation in aid to Greece and other nations.
But the court said the government must first get approval from a parliamentary committee, which could further slow a response. The FTS Eurofirst 300 index of top European shares increased 2.8 percent.
Blah blah blah. In terms of crisis management, this is a big "Duh!" moment. And it moves markets. The key to crisis management is bringing stability. It never comes fast enough. But the pursuit of stability creates an atmosphere of predictability.
This is what sideways feels like. We dive onto the banana slide in the back yard and tumble off the end into the grass. Our knees hurt and we don't go back to the line to do it again. Then the sting wears down, the water is spraying, everyone's having a good time, and we throw ourselves down onto the banana slide again... rinse repeat... rinse repeat...
I haven't posted in the past couple of days because... nothing... has... changed... Nothing. Nothing happened today that we couldn't see before today, and the same was true yesterday and the day before that, and the same will be true tomorrow and I bet the day after that. Nothing fundamental is changing right now. The only arguably fundamental thing that's changing right now is investor rationality. It's exceptionally low.
Buy the dips, sell the highs. It's like taking candy from a baby right now.
Here's a chart of housing inventory, courtesy the reporting companies and a post at http://www.calculatedriskblog.com from last year through this year -- notice what sideways looks like. Hint: sometimes it looks up, sometimes it looks down, but it's really just sideways. Expect this through 2013.
And S&P continues to soil itself in front of the world by sparking generalized fear that will be short-lived and guess what -- a flight to safety by investors into... wait for it... wait for it... United States debt!! That's what they just downgraded!!
That's right, the equity (stock) markets may be down, but investors are fleeing to the safety of United States debt. Mmm hmm...
10-Year Treasury yields are way down hovering below 2.4%. If our debt were such a "crisis," we would be seeing sharply higher rates since - according to S&P - our debt is not as safe. It seems the markets disagree strongly.
There's little sense in what's going on today in the sell off. Smart money buys equities.
It's Sunday evening and markets are open in Asia, futures are open too. Dow futures are hovering around -275 points (counting fair value) and has been holding and is now at 9:15 ET well off its lows. If markets dip tomorrow again, smart money buys.
No observer, no analyst, not even S&P has yet been able to explain a true fundamental economic reason that the U.S. - and not France or Germany or Finland per se... all AAA - deserves a credit downgrade over its AAA former peers. There is plenty of talk, however, of why we don't need "credit" rating agencies at all, particularly with records such as S&P and others. If these companies were paid on accuracy, they would have fallen along with Lehman. Read the report (see prior post for link). It is nakedly political (though not partisan) and not economic. It describes nothing that political analysts and prognosticators have been and are still saying. The short-term, medium-term, and long-term trends, including the political, have not changed. The debt debate was not the first time our government has played brinksmanship.
The world is selling off. Why? Because as George Soros points to again and again in his finance books, such as The Alchemy of Finance, the markets are a psychological game of expectations, namely game theory. It's not about the fundamentals now. It's about "what do I think that other people think?" Moreso, what do I think that other people think that other people think? And so on. With that, basic human psychology especially with greed and fear, you get ridiculous market fluctuations based nothing on fundamentals but almost entirely on the psychology of game theory. And that's not a way for savvy investors to play the market.
Answer? Pay attention to the fundamentals, corporate profits and balance sheets, comparative national economics, and solid apolitical indicators. The fundamentals investor will be buying these dips.
France has a AAA credit rating from S&P, though it too is threatened by S&P. What other countries does S&P believe deserve a higher credit rating than The United States?
Really? Really. All of these countries have socialized medical care. And they still get AAA rating from S&P. Another thing most all of these countries have is a parliamentary system, in other words, no filibuster, and therefore true "majority rule." Gridlock not only is less likely, it's practically impossible since governing is by definition about forming 51% in government formation and in decisions. Again, no filibuster, no "pocket filibuster," no presumed filibuster or "holds" in the Senate requiring 60 votes on everything. Their fiscal battles are hard fought and the austerity measures being imposed in some of the Eurozone parliamentary countries including France are causing riots. But the work is getting done.
None of those countries have a "debt ceiling" law either. S&P, which are not political prognosticators and whose decision was primarily steeped in politics, cites mostly the political dynamics of The United States, not fundamental fiscal problems.
The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. ...
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt...burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers...
In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging...
And lest you think S&P wants all spending cuts, witness:
It appears that for now, new revenues have dropped down on the menu of policy options.
What else? Oh, part of their downgrade reasoning is because they now believe that Congress and the President have indicated by their actions that they will not allow The Bush Tax Cuts for the super wealthy to expire, thereby limiting the potential for signicantly higher revenue opportunity in the nation's finances. Clearly S&P knows basic finance: that tax cuts do not help deficits.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
Finally, this basic Q&A about the situation from Reuters is something that both retail and advanced investors should review. Bottom line: while it brings some interesting analysis to the table, S&P made bad calculations, has lost all credibility as its function as a credit rating agency, and is now better suited to make commentary in the FT, WSJ, Reuters, Bloomberg and elsewhere as merely political prognosticators.
Smart investors don't give a flip about S&P. Why do we even have credit rating agencies? Must we really outsource our own thinking to some big company that overvalued the mortgage-backed securities that turned out to be worthless and led to the biggest recession since the Great Depression? Records show they didn't even understand what they were rating then. Why should we think it's any different now? I don't think we should. The 10-Year Treasury is at c. 2.5%. The world is begging The United States to borrow and invest in its economic recovery. This isn't Europe. We're strong. And S&P a) is that stupid or corrupt, or b) has been set up.
Okay yeah I know what's going on today around the world and indicators etc. But there is no good fundamental reason for today's market sell-off. None. Nothing is different today substantially from yesterday or last week. Strong corporate earnings with generalized cautionary notes of total CYA for Q3, but still... Strong earnings. Corporate balance sheets with fat cash. 10-Yr Note at 2.46%. This is generalized fear with no basis. That equals opportunity.
It's all just a little bit of history repeating...........
We tend to have short historical memory. Ronald Reagan signed bills to raise the debt ceiling 18 times. George W. Bush did it at least 7 times. Typically, doing so is so routine -- and such an obvious need for the economy -- that the bill to do so is one page. And now we have this manufactured crisis.
Let's review: If the United States of America defaults on its loans or can't pay for all the things Congress has already approved for spending, then the world's investors will no longer see the U.S.A. as safe an investment as it has always been. Remember the 10-Year Treasury Bond is the gold standard of safe investments (see prior posts).
If that happens, then investors will require a higher interest rate for the 10-Year Treasury. If that happens, because the 10-Year Treasury sets the floor for almost all other interest rates, we will see a rise in interest rates that businesses use (big and small) to finance their businesses and therefore will incur a manufactured "tax" on their loan interests. Consumers will see a rise in interest rates in credit card rates, car loan rates, and most devastating of all, mortgage rates. If you don't like tax hikes, you will abhor this.
Still, there is this manufactured crisis that is threatening to become all too real right now, forced by our politicians over something that should be routine. Should there be a debate and resolution about sustainable financing of the government? Of course. Should it be at the threat of the nation honoring it's debt obligations? Oh hell no.
The time for the honest debate has now passed. We can continue it, but we can't let the United States of America default on its debt obligations. The market plunged 200 points today in the Dow. It may be occurring to "serious smart" money that the adults in Washington DC are actually, possibly, not in charge.
Still, though... this too shall pass. We won WWII and our economy rebounded. We fought the USSR and won. We dealt with 911 and $2+ Trillion in historical tax cuts while fighting 2 simultaneous, rather ill-advised wars. We took a budget surplus in 2000 and turned it into a stupendous debt even before the economic crisis happened. Reagan gave us our first trillion dollar debt. The debt when George W. Bush took office was "only" $5.6 Trillion. Can this nation have been through so much, and done so much in the past 10 years, that we can't set the course straight again? I doubt it. And so do the world's investors who are help fueling our frustratingly slow recovery, but still a recovery. Mortgages and the 10-Year are still historically low today, even with the Dow 400 points down this week.
How patient will the world's investors be, however, if our politicians continue not to be responsible with our nation's economy? Will this become another historical inflection point? I hope not. I hope the adults really are in charge. We'll find out what the world's financiers, who have our economic future in their hands by the decisions they make based on risk factors only, believe as they continue to watch the absurdities taking place in Washington DC. Let's hope the adults take the wheel soon. I predict they will.
It took until today for a 2nd degree "veto threat" of the Boehner plan, which Wall Street and CBO has also warned would not avoid a downgrade in our AAA national credit rating by S&P.
Key to understanding the current political theatre is bearing in mind how presidential elections are won in the end: within 2%. So winning the presidency, after the primaries, is thus: scare the base + motivate the base + independents = 51%.
So all of the fight for the incumbent presidency is about a fight for the middle 2% of the electorate. I think that's why the President kept a mostly moderate tone and didn't throw any serious jabs; at one point even paid credit to Speaker Boehner. Most watchers, including me, wondered if he was going to issue a 1st term Clintonesque unequivocal veto threat. That would have pushed away the middle 2%.
Instead, today, only under the light of us wonks following every move, the White House issued the 2nd degree veto threat of the Boehner plan by saying that the Presidents "advisers" would recomend he veto it (namely a short term bill instead of one that Wall Street prefers and we need which would extend the debt ceiling through 2012). The 1st degree threat is an outright declaration from the President himself. I doubt that's forthcoming. It would be like rubbing your feet on the carpet in a room full of gas.
The markets still aren't reacting to the made-up crisis. That's encouraging. But Wall Street and Bloomberg News and the head of the IMF made clear today that the time for resolution is immediate. We'll see how seriously the "serious" people in Washington take that message.
I'm amused now, July 25th, reading my most recent post foretelling the path of the debt ceiling debate from two months ago. Up until today, I have stood by my last post. But tonight, the President has called a national address on all news and network channels. Why?
Today, the markets (to be clear, by "markets" I mean the stock and generally traded markets; I once was deposed as a witness by a dim-witted attorney who didn't understand the context of how I use the word when he cited a blog post of mine), anyway today the markets didn't react much at all to the unresolved debt ceiling debate. I think that's because the "serious, smart" money thinks as I do and many others, "Well of course Congress will raise the debt ceiling to avoid financial Armageddon in a sputtering economic recovery." But tonight that becomes less clear. There is no "forming consensus" in Washington. No plan at all - and I can count at least 5 plans - none can pass Congress as things stand.
To be clear, the Democrats and this Democratic President have put, contrary to past ideology of the party, a) entitlement cuts on the table, b) a $2.7 Trillion spending cut plan with no new revenues plan on the table (Senate Majority Leader Reid's plan), and c) last week, the President was pushing what most financiers are wanting, the "Grand Deal" of $4 Trillion over 10 years deficit reduction with a mix of spending cuts and new revenues (which doesn't necessarily mean tax raises) at a ratio of 3/4 spending cuts (is that a party of "spending?") and 1/4 new revenues without raising marginal tax rates. If the Republicans think the President was bluffing, my god why didn't they call his bluff?
Right now the Republicans are losing, despite what the very able and smart Ezra Klein says at The Washington Post, and they could be losing for a generation. If the President and Democrats win big with the message that Democrats are the economically sensible party, they will be able to show that they have been willing to stand up to their base and bend over backward (as usual) to accommodate Republicans, particularly on an issue that middle-road voters perceive Republicans always win. No more. No more? We'll find out.
What's clear is that the new (2008 and especially 2010) Republicans in Congress are the most radical of this generation. It's clear that the intersection of "gut politics" (think Southern Strategy of Nixon) and the very serious nature of... reality... are coming to an uncomfortable and potentially explosive junction within the Republican party. Now what?
Well for now we just have to wait 3 minutes and see what move the President makes next...
Okay, so the Republican House of Representatives held a "symbolic" (I call "theatric") vote not to lift the national debt ceiling today. Raising the debt ceiling is about fulfilling our promises as a nation. Republicans and Democrats have already voted for and passed a national budget that everyone knew and knows would require a raise of the "national debt limit" (what an oxymoron). So the "showdown" is completely hollow. Despite the disastrous effects of defaulting on our debt payments, some of our politicians pretend Congress hasn't already committed to the spending and therefore the debt it incurs. So all of this is political theater. Make no mistake.
Now the "real" debates happen (also theatrics) in which Republicans fight for budget cutting (where was this zeal during the previous Republican administration?) in exchange for raising the "debt ceiling." Please. Watch what they most want to cut. That tells you something about a politician's real motivation.
After all the theatrics, the Congress will vote to raise the debt ceiling to the levels to which they've already committed via prior budget approvals. Without that approval, Armageddon happens. So you can bank on it being approved... and everything else being theatrics.
Some people have requested that I post some materials from some guest lectures I have given and courses I have taught. I thought I could pull out this dusty old blog and, as time permits, post some of the charts I use with general commentary - and use this also to post updated charts, economic indicators, business news, and policy and politics with respect to national economics, which has quickly come to a point of nadir in our national discourse.
I have not touched this blog in over a year and mostly didn't maintain it much since I started it in 2004. Over the past year, I would say my political orientation has trended more moderate as we've seen more policy-making from Democrats in The White House and majorities in Congress, and now with a divided Congress. I don't like a lot of what I see on both sides, and I think both sides are working together and with media to undermine the real discussions we should be having as a nation. I will attempt to deconstruct a lot of that here, and to try and point readers and myself in more constructive directions.
I will not obfuscate my point of view, which is discernably conservative in some respects and notably progressive and liberal in other respects. Bear in mind that the bounds of those labels do shift over time. Richard Nixon offered a national health care plan, but Democrats didn't think it went far enough at the time. When President Carter offered a public health system to Ted Kennedy, Kennedy opposed it, partly because he thought it wouldn't work, and partly because he was planning his epic 1980 run for president against President Carter. I'm just one person, and if I'm not your flavor of coffee, that's okay.
You're welcome to comment or email me if you'd like more discussion or with questions, and I will get to that as time permits.
Please note to the right of the page I have accumulated over time a list of other people's related blogs, mostly economic related and not all with a partisan or ideological bent, many of them academics. I encourage you to check them out and please email me any others I should consider listing there (or any I should unlist).
Your interest flatters me just by visiting the page. This will be an experiment. If I'm unable to keep things posted daily or every other day, I may alert those of you whose email I have when a new post goes up. Let's see how this goes! Onward, outward, and forward....
