Sunday, August 21, 2011

notes on the week ended Aug 20th

the already bleak economic outlook deteriorated even more this week; i dont think ive ever seen so many downward forecast revisions in such a short period as ive seen over the past few weeks; they started, of course, with the Fed's pronouncement last week that conditions had gone downhill so much that they decided to commit to keeping the fed funds rate near zero "at least through mid-2013."; this week, the litany of revisions started with moody's analytics reducing their forecast for this year's growth from 3.5% down to 2%, and similarly reducing their 2012 forecast to 3%; then morgan stanley weighed in on the global economy, reducing their global growth forecasts to 3.9% in 2011 and 3.8% in 2012, from the previous forecasts of 4.2% and 4.5%; then on friday, after a dismal philly Fed report, it got even worse, with wells fargo, goldman sachs, jpmorgan & citigroup all revising their outlooks for the remainder of this year & next, all to below a 2.1% growth rate; jpmorgan was on the low end of those with a prognosis of only 1% growth for this year & only 0.5% growth even extending into the first quarter next year...less than 6 months ago they all thought growth would reach 4% or more by the 3rd or 4th quarter of this year...in general, all also forecast unemployment to remain high or get worse...the Philly Fed index, a gauge of manufacturing activity in the mid-atlantic region, had been expected to continue to show a modest rebound (ex the japanese supply chain weakeness); instead, it showed a contraction at -30.7 for august, the lowest in 2 1/2 years...coupled with the empire state index, released earlier from the NY Fed, which also showed slowing, the two are generally indicative of coming weaker national numbers when the ISM report is released later...these reports, coupled with the record low consumer sentiment and surprisingly high trade deficit numbers we got last week, paint the overall gloomy picture...

while the volatility in the stock market has been making the daily headlines, the real action continued to be in the market for treasury bonds; recall how they rose to new highs in defiance of the S&P downgrade last week; this week interest rates on the 10 year Treasury slipped below 2% for the first time in 70 years, and 5 & 7 year bond yields were at historic lows...part of this is the so-called "flight to safety"; ie, investors getting out of volatile european and equity markets to park funds in secure treasuries...but what else does this buying of ten year bonds yielding 2% imply? that those controlling trillions of funds worldwide dont expect anything to do better than return 2% over ten years? understand, that if you're holding one of those bonds and rates rise, the marketable price of the bond declines; if the economy improves & rates rise anytime in that ten year period, someone is going to take fairly big losses; all i can figure is they must be expecting that to be better than no return at all from stocks, or complete dissolution of the euro-zone....anyhow, i did find a 200 year bond rate chart from Société Générale, originally published in march of this year, at which time rates were obviously higher (the black horizontal line) to give you a picture of how unprecedented rates this low really are…click it for a larger chart…

chart

what interest rates on Treasury debt this low should also tell you is that we dont have a debt problem, despite all the rhetoric from bankster funded politicians on both side of the aisle; if anything, there is a worldwide shortage of safe assets...a better measure of our debt situation is the cost of funding it, which is now at historic lows as a percentage of government outlays (see chart) or as a percentage of GDP...with the cost of servicing our debt at an all time low we should be borrowing even more now & investing in the future of this country, and making good use of all the nearly free money the rest of the world is giving us...someday in the future, when this country's infrastructure has deteriorated, we're going to look back at this time and ask how they could have been so myopically stupid as to have let this once in a lifetime opportunity of an idle workforce & lows funding rates slip by...

 

obviously, with rates on the benchmark treasuries this low, other long term interest rates throughout the economy have also continued to fall; freddie mac reported fixed rate mortgage rates are now at the lowest in over 50 years, with the 30 year mortgage at 4.15% and the 15 year mortgage at 3.36%; 1 year adjustable rate mortgages at 2.86% are the lowest they've ever been since that type of mortgage was offered...even so, the two housing metrics that were reported this week declined: new housing starts were at 604 thousand in July, down 1.5% from the seasonably adjusted June rate of 613 thousand, and existing home sales declined 3.5% from last month, with a high cancellation rate again depressing sales...

there have been a few reports out on the intense lobbying of the dozen members of the "super-congress" who will be deciding by thanksgiving what areas of the federal budget to cut 1.5 trillion dollars from; unsurprisingly, of the millions in contributions that those twelve have received, the lions share comes from wall street, with defense, real estate & insurance industries also well represented; as far as i know, there arent any campaign contributions representing those on food stamps or on the women's, infants & children programs, so we can guess what kinds of expenditures will get the ax first...

there have always been a number of posts around the econoblogosphere which attempt to push back against one or another proposal of some politician, but what i found personally depressing this week was the large number relating to candidates who will be running in 2012; i guess rick perry of texas announced about a week ago, & i must have seen 4 dozen posts relating to his economic policy in texas, his environmental opinions, and his threat against ben bernanke ("we would treat him pretty ugly down in Texas") ie, if ben should decide to use monetary stimulus before the election (here's the video) …before the week was through, i had included a bunch of links to them in this week's blog, both in the Fed coverage near the top and in my state budget coverage section; but politics aint why im out here, and i’m going to try to curtail including such links in the future...it is depressing enough already recording the country backsliding economically when the obvious solutions are at hand, without recording all the ad hominem attacks occurring in the political arena while the conditions in the rest of the country are being ignored...

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me


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