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1930's-Style Collapse Haunts
Economy |
Week of Monday,
June 30th, 2008 |
Mortgages are sticky near
6.50%, Treasury's getting most of the flight-to-quality benefit from the
stock market dive.
Economic data last week were slim and predictable: consumer confidence
fell again, and rebate checks plumped May spending and income, but gave no
durable, corner-turning boost. The "personal consumption expenditure
deflator" in the spending/income report confirmed the remarkable (and
painful) "core" inflation performance, only a .1% gain: prices for
everything except food and energy are on or over the edge of deflation.
This week was all Fed and markets. Analysts' responses to the Fed's
meeting have described two different economies and mutually exclusive
policy responses: one, the mainstream view that the economy is too weak
for the Fed to raise its rate, the second that inflation-fighting and
dollar defense are paramount.
The disagreement itself is traditional, but the extraordinary situation --
energy shock combined with 1930-style banking collapse and unprecedented
emerging-market growth and trade and currency stress -- has added
extraordinary heat and uncertainty.
There also appears to be an unusual political divide between the two
views: the insurgents are right-side and stock-market champions in
editorial dominance at CNBC, the WSJ, and Fox, joined by a few hard-headed
and punishing characters in the Fed's own regional banks. The credit
markets from late May until last week traded with the insurgents: the
economy was not so bad, and the Fed should and would begin by August a
sustained series of rate increases. Thus market rates rose in
anticipation. The Fed's post-meeting statement made clear that near-term
rate increases are unlikely, and the inflation/dollar defenders
immediately accused the Fed of a lack of courage.
The object of the dispute is the Fed's set-point for the overnight cost of
money, at 2% deemed too low by the insurgents. They claim that if the Fed
began to raise it, the dollar would strengthen, dollar-denominated oil
prices would fall, and so would inflation.
Possibly as late as the 1980s, this claim might have had merit; today's
world is much more interdependent and resistant to unilateral action of
this and other kinds. To fight inflation, so long as you're not printing
money (we're not), you must slow your economy. We get from the policy
insurgents either a belief in miracle cure without economic pain, or
deception about just how slow they want the economy to get. In dollar
defense, none of these people have a plan for the damage done by a $2
billion dollar per day excess of imports over exports -- Warren Buffett's
well-made point.
The Fed funds rate is relative to many things: 2% today versus 5.25% last
August, and the ECB's 4%, must be measured in relation to overall credit
conditions, which are extremely -- possibly ruinously -- tight. A low
funds rate is the only way the Fed can help the banking system to rebuild
capital: earnings from wide short-long spreads.
Our only quarrel with the Fed's statement is its claim that "Downside
risks to growth... have diminished somewhat." Mr. Buffet on Wednesday: "I
watch kind of a lot of real-time data, and the economy is weakening -- if
anything, weakness accelerating." Amex said that its June customer credit
indicators had deteriorated "beyond our expectations." New purchase
mortgage applications are two weeks into an 8%/week compound decline.
OFHEO's balanced, broad, and non-hysterical measure of home prices finally
began to decline in April.
Energy, commodity and food prices are out of control, but asset prices are
deflating, houses and now stocks; the Dow is down 14% for '08, 19% since
October. In evidence of terminal capital exhaustion, the DJ Wilshire Bank
Index has lost half of its value in just 16 months. Chrysler denied plans
to file for bankruptcy. Last week.
The Fed is playing this just right: fly the economy just above stall
speed, because a stall might be catastrophic. Those who think a deep
recession is a better idea should say so. The Fed needs help in the form
of Asian/emerging slowdown; how, when, and with what political
consequences there, we do not know, but it is coming.
2008 ISSUES
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provided by:
Ashley Hickmon
Loan Consultant
Crestline Mortgage
303-669-8454 |
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thehickmonteam@crestlinemtg.com
Economic Notes is published
weekly by the Economics Department of Universal Lending Corporation as a
service to Colorado Real Estate professionals. © 2008, all rights
reserved.
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