Tuesday, January 26, 2010

Evidence of Slowing Growth Momentum

Bloomberg.com has 3 articles on its front page pointing in the same direction of decline in the rate of growth, which is generally not good for stock prices:

U.S. Trade Deals Falter as Unemployment, Democrats Mute Obama;

Credit-Default Swaps Rising to Five-Week High ;

Stocks, Commodities Fall as China Curbs Lending; Dollar Rises.

Then you have what has become the typical incoherence out of Washington with the following two offsetting headlines:

Senate Democrats Said to Consider $80 Billion Jobs Legislation

Obama to Call for Three-Year Freeze on Some Federal Spending.

In addition, BB reports a marginal GDP change in Britain for Q4 last year:

Jan. 26 (Bloomberg) -- The U.K. economy resumed growth by less than economists forecast in the fourth quarter as service industries and manufacturing expanded just enough to pull Britain out of its longest recession on record.

Gross domestic product rose 0.1 percent from the third quarter, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 33 economists was for a 0.4 percent increase and the lowest prediction was for a result of 0.2 percent
. . .

“It’s clearly disappointing,” Simon Hayes, chief U.K. economist at Barclays Capital and a former Bank of England official, said in a telephone interview. “The recovery is going to be uneven. I think the Bank of England will halt quantitative easing in February, but if we don’t see sustained growth it’s likely we may see them extend it in the middle of the year.” . . .

The recession, which lasted for six consecutive quarters, has shaved 6 percent off GDP, the statistics office said. The economy shrank 4.8 percent in 2009, the biggest annual drop since records began in 1949, officials said.

The economy contracted 3.2 percent from a year earlier in the fourth quarter, compared with a median decline of 3 percent forecast in a Bloomberg News survey of 30 economists.

The evidence is growing that in the developed countries, we have reach a period where simply fiddling with the cost and quantity of borrowed funds is not enough to have a big effect on the economy. It now takes special giveaways such as were embodied in cash-for-clunkers and a first-time home buyers credit to goose sales; but these largely simply bring demand forward.

I do not believe that the credit crisis is finished.

Those who cheerlead for Ben Bernanke should consider the following analogy.

Dr. Bernanke committed malpractice by not treating the risk factors for an economic heart attack, instead encouraging the patient to smoke and eat rich, sugary foods. He did not order an angiogram when angioplasty or a bypass might have prevented a heart attack. When the heart attack arrived, he was part of a team that threw everything modern medicine had, and the patient suffered a cardiac arrest as part of the event but survived. The patient is now engaged in a prolonged recovery with uncertain prospects and has resumed his bad lifestyle habits, having resumed smoking and eating the wrong foods, without the doctor's opposition. The doctor is continuing intravenous therapy long after the event, which is a sign of weakness in the patient's condition.

Meanwhile, on CNBC today, the commentators were dismissive of the opposition to the doctor staying on the case. "Fringe" was Joe Kernan's characterization of the opposition.

It's time for a change at the Fed. It's also time for a true Straight Talk Express to advise the American people that an equity culture trumps a credit-based one. The focus needs to be on a truly sustainable economy.

As the above Bloomberg headlines demonstrate, monetary policy cuts both ways. It in fact may be in the government's interest for stocks to fall so that people get scared and rush to the "safety" of Federal debt so that the massive deficits can continue to be financed cheaply, a la Japan (which is on its way to be rated not much above California if above it at all).

These are truly unprecedented times, with the over 400-year old Bank of England having its lowest borrowing rates in its entire history (see EBR's 1694 and all that from one year ago).

Thus the past is an uncertain guide to the future. As with a frail patient, even a small gust of wind can cause a fall.

Thus the emphasis at EBR on high-quality assets.

Copyright (C) Long Lake LLC 2010

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