Tuesday, August 4, 2009

The State of the Economy

Peter Boockvar at The Big Picture summarizes: "S&P 500 back to 1000 after a rally of 50%, the 10 yr bond yield at 3.70% versus its 47 year average of 6.90%, inflation expectations over the next 10 years below 2% according to the TIPS, an expected July CPI reading of -2.1%, the biggest drop since 1949 and a Federal Reserve that is made up mostly of those who think inflation is subdued and will be for the next few years."

Tim Duy's Fed Watch puts it into narrative context: Is a Jobless Recovery Your Best Friend?:
"Never underestimate the power of money. Especially lots of money coming on top of a cyclical recovery that is almost textbook at least as far as the timing is concerned. To be sure, you can question the sustainability of the recovery, the breadth or health of the recovery, the nature of job growth. I have questioned all repeatedly and fail to see that the conditions that have dominated the US economic story for the past 25 years - primarily, a continued reliance on consumer spending to propel growth - can continue in the face of massive household debt burdens and stiffer (or, more accurately, realistic underwriting conditions). But regardless of these concerns, evidence is clearly pointing to a shift in economic conditions for the better. . . it seems likely the appetite for risk will continue to climb, and all the liquidity - liquidity fueled by new guarantees that massive financial institutions are too big too fail - has to go somewhere.

"Which is to say that no matter how pessimistic you are in the medium and longer term, you need to recognize the potential for massive moves in markets as risk taking perpetuates more risk taking. And as long as that risk taking flows in directions that do not fundamentally change the US jobs and, by extension, wage picture, it is difficult to imagine the Federal Reserve will do anything but let the party role on. . . .

"Wages and salaries for private workers climbed a scant 0.2%. To be sure, this raises concerns about the durability of consumer spending going forward, especially when combined with fears of a jobless recovery. Indeed, I have argued that most if not all of the jobs in the manufacturing sector simply are not coming back. My suspicion is that firms will use the recession to expand overseas supply chains wherever possible. Moreover, firms will not be in a rush to hire back without a clear resurgence of growth, which seems unlikely to occur given precarious household debt burdens.

"Now comes the tricky part - what does the evolving economic dynamic imply for financial markets? I am increasingly of the mind that although a jobless recovery will be a dreary fate for the American people, it offers the best outcome for financial markets for one simple reason: The jobless recovery offers the greatest probability that the Fed remains on the sidelines. The jobless recovery is what keeps the Fed goose laying the golden eggs."

OK, so what's the punchline?

Tim Duy: "When will that bubble burst? Possibly 2012, . . . "

No comments:

Post a Comment