Has the Market Fully Discounted the Bush Presidency ?
What is it that the market is pricing in?
While partisans try to blame the crash on one or the other candidates, here's something I have yet to hear any of the TV pundits discuss: The George W. Bush presidency.
While partisans try to blame the crash on one or the other candidates, here's something I have yet to hear any of the TV pundits discuss: Blaming it on the presidency of George W. Bush.
Currency Markets are the world's vote on US monetary policies
S&P500 2001-08, weekly
Equities: Which Sell off do you hold the occupant of the White House Responsible for: The One that began prior to his arrival, or the one that began prior to his departure?
Chart courtesy of Fusion IQ, Bloomberg
I do not believe that the 2000-03 crash was a result the markets pricing in a Bush Presidency. However, one could certainly make the case that the past few years market action has been the result of his fiscal, tax, and spending policies.
Oil Prices Respond to Energy and Military Policies
Two oil men in the White House, two wars, no conservation efforts, and no attempts to develop alternatives to Crude Oil:
Gold, 2001-08 weekly
The Gold market is a store of value in uncertain times -- what is it saying about the Bush policies?
Chart courtesy of Fusion IQ, Bloomberg
Bonds: 10 Year Treasury, 1980-2008
Chart courtesy of Fusion IQ, Bloomberg
Longstanding downward trend in rates was in effect since the Volcker Fed broke inflation in 1980 -- recent Presidents (W, Clinton, Reagan) have all benefited from this trend
What are the markets really pricing in ? Might it be the W. presidency?
Pricing in a Bush Presidency (July 08, 2008)
Adjusted Monetary Base
And speaking of sucking, how about this chart? Check out that huge spike at the end -- as big as Greenspan's Y2K money supply surge.
There is an inflationary spike somewhere out there, once we get through this massive deflationary period.
Here is the longer term view:
Notice how this spike dwarfs 2001 post 9/11
Research Division of the Federal Reserve Bank of St. Louis
Bianco Calls Fed Liquidity Efforts 'Hyper-Inflationary': Video
Jim Bianco, president of Bianco Research LLC, talks about the Federal Reserve's move to provide up to $540 billion in loans to help relieve pressure on money-market mutual funds, credit market conditions and the outlook for the U.S. economy and stock market.
00:00 Fed move to buy money fund commercial paper
01:59 Commercial paper market; "shortage" of loans
04:36 U.S. credit markets, Fed liquidity efforts
06:59 Outlook for housing, mortgage markets
07:54 Potential second stimulus a "short-term fix"
09:27 Fannie and Freddie loan, mortgage rules
11:08 Bank lending practices, housing market
13:10 Fed liquidity efforts: impact on inflation
16:01 Outlook for U.S. dollar, stocks: strategy
Running time 19:47
Bianco Calls Fed Liquidity Efforts `Hyper-Inflationary'
Bloomberg, October 21, 2008 13:30 EDT
Paul Volcker the Campaign Advisor
Long time readers know that I am a tremendous admirer of Volcker, and this morning's WSJ has a fascinating article about the relationship between former Fed Chair Paul Volcker and Presidential candidate Barrack Obama:
"Mr. Volcker delivers gravitas and credibility to Sen. Obama, people in the Obama camp say, as well as ideas and approaches to the economic crisis. "Volcker whispering in Obama's ear will make even Republicans comfortable, because he's a hero of the right and a supporter of a strong dollar," says John Tamny, a supply-side economist and Republican...
For Mr. Volcker, a connection with Sen. Obama could help burnish his record as Fed chairman. The cigar-chomping central banker from 1979 to 1987, he received blame for driving up interest rates and tipping the U.S. into the deepest recession since the Great Depression. But Mr. Volcker is just as well known for taming the runaway inflation of that era. His stock has risen in recent months as his gruff warnings about the risks of deregulating the financial sector have come to look prescient. His successor's reputation, meanwhile, has come under a cloud. Alan Greenspan is under criticism that the low interest rates and deregulatory ideology of his tenure contributed to today's crisis.
With nearly every day presenting a fresh financial emergency, Sen. Obama has persuaded Mr. Volcker, who travels the globe for economic meetings and occasionally disappears on fly-fishing trips, to be at the ready; Mr. Volcker now keeps a cellphone on him at all times. And though he still doesn't own a computer (his assistant prints out emails for him), he's gotten used to Sen. Obama's rapid-fire messages sent from a BlackBerry device...
But for now, and going into the campaign's final weeks, aides say Sen. Obama is increasingly relying on Mr. Volcker. His staff now routinely reviews policy proposals and speeches with Mr. Volcker. Conference calls and face-to-face meetings of the Obama economic team are often reorganized to accommodate his schedule. When the team discusses the financial crisis, "The most important question to Obama: What does Paul Volcker think?" says Jason Furman, the campaign's economic-policy director."
From an economic perspective, I did not take the Obama candidacy seriously -- until I heard about Volcker's role. When one of the greatest Fed Chairs ever starts consulting for a relatively young candidate with limited fiscal experience, you notice it.
Volcker Makes a Comeback as Part of Obama Brain Trust
WSJ, OCTOBER 21, 2008
Crude Oil = $75
Talk about your deflation:
Crude Oil via Barcharts
BLS: Misconceptions about the CPI
I've been meaning to get to this for weeks: Common Misconceptions about the Consumer Price Index: Questions and Answers.
I don't buy their argument this, but I wanted to at least pass it along for those who are interested in seeing the BLS defense.
Hat tip Mark Thoma
Addressing misconceptions about the Consumer Price Index
John S. Greenlees and Robert B. McClelland
Monthly Labor Review, August 2008
Common Misconceptions about the Consumer Price Index: Questions and Answers
A Disastrous Rate Cut ?
Why on earth the FOMC would want to undo any of the work by Treasury with a rate cut? The whole idea of letting Lehman die is to reintroduce the concept of risk and eliminate some of the Moral Hazard fostered by prior bailouts.
The current market bet is that a 25 or even 50 basis cut may occur at tomorrow's Fed meeting.
That would be ill advised.
We have survived the initial impact caused by the collapse of Lehman Brothers (LEH). AIG is certainly in trouble, as are Wachovia (WB) and Washington Mutual (WM) and others.
The Fed would be well served, with rates now at 2%, to keep some powder try for the latter innings of this crisis.
Unless we are looking to emulate Japan's 15 year recession, a ZIRP/pushing on a string policy would not be advantageous.
GDP fails ‘commonsense sniff test’
At the Columbia School of Journalism yesterday, a large part of our discussion was on how the media should report and interpret economic data. We used GDP and Inflation as the classic example.
By coincidence, the AP had this very astute article on Q2 GDP yesterday afternoon:
"It was a rare bit of stellar economic news. The Commerce Department revised Gross Domestic Product upward last month, saying the broad measure of the economy grew at an annual rate of 3.3 percent for the second quarter, up from an initial estimate of 1.9%.
One problem: A vocal group of analysts and economists isn't buying it. "Quite frankly, we do not think the report passes the economic commonsense sniff test," wrote economists John Ryding and Conrad DeQuadros at RDQ Economics.
GDP measures the market value of everything produced by labor, plants and properties in the U.S. a total of $14.3 trillion for the second quarter. The government agency charged with calculating the first estimate of each quarter's GDP has less time to do so than a ten-branch bank has to file an earnings report . . .
Criticisms of second-quarter GDP were more granular. Disbelievers say it was skewed by some of the conventions that make it consistent from one quarter to the next and strip out foreign inflation . . .
Then, there's the inflation picture. To calculate growth, the government tries to strip out the illusion of growth that comes with higher prices. Nominal GDP, which includes inflation, can look great; but strip out that inflation and the picture can change markedly.
To strip inflation out of the data, the government devises a "deflator" that subtracts inflation from nominal GDP. In the second quarter, that deflator was 1.3, a figure that was half what it was in the first quarter and tied with a 10-year low. Starting with nominal GDP of 4.6 and subtracting that 1.3 deflator, we get real GDP of 3.3.
If the government had used the same deflator as it did for the first quarter, 2.6, GDP would have only been 2.0.
Consumer inflation for July was the fastest it had been in a generation, moving up at a rate of 5 percent for the previous 12 months. Had the deflator been that large, we would have seen negative growth for the second quarter." (emphasis added)
Normally, we at TBP are months ahead of the MSM. If they are only a few weeks behind, that is a huge improvement.
Q2 GDP = 3.3% (kinda) August 28, 2008
Is GDP (via BEA) Measuring Growth or Inflation? August 28, 2008
Critics: GDP fails ‘commonsense sniff test’
AP, 3:45 p.m. ET, Tues., Sept. 9, 2008
Real GDP? Maybe not, critics say
Associated Press, September 8, 2008
Taking a Closer look at Other 3+% GDPs
Over the years, I have criticized a variety of official data points as misleading: Consumer Price Index (CPI) for woefully understating price increases, Non Farm Payrolls (NFP) due to the Birth/Death Adjustment, Core Inflation for omitting anything going up in price (aka inflation ex inflation), The Unemployment Rate due to the shrinking labor pool, and GDP due to the excesses of the deflator.
All of these data series have something in common: They all have had gradual changes in their methodologies over time. These incremental improvements in modeling, data gathering and analysis have slowly altered the various econometric models that are used to produce the official numbers: NFP, GDP, CPI, etc.
My main criticism has been that many of these changes have been for the worse. If we define any model as a mathematical attempt to portray reality, than anything that takes us away from reality is a negative. Any modeling change whose output generates further variance from the ideal construct worsens the veracity of the model.
Stated differently, do the changes improve the official data, or do they create an artificial world that does not resemble the one we live in?
Over these many years of critique and criticism, I have noticed two interesting factors:
1) The tendency for many Wall Street and academic economists to 'circle the wagons' around their chosen profession (i.e., blindly defend standard precepts). Hey, if you are going to go through the trouble of getting a doctorate in something, you probably don't want to hear how flawed many of its basic assumptions and/or methodologies are.
2) The false counter-arguments, strawmen, and phony debates. There is no faster way to admit the weakness of your argument than to claim that credible criticism is merely a tinfoil hat conspiracy theorists. (A variation of "When the Law and Facts go against you, call the other lawyer a jerk" approach).
Good debate, on the other hand, makes your analysis better -- it sends you back to the data, forces you to look at things in different ways, and sharpens your arguments. Indeed, good arguments should help lead to their own defeat in the marketplace of ideas, as they bring about even better critiques. (See David Altig's spirited defense of the Deflator here).
Which leads us to taking one last look at the revised Q2 GDP data, showing the economy expanded at an annual rate of 3.3%.
My argument, repeated ad nauseum -- see "Previously" below -- was that number misrepresented what was occurring in the real world economy, primarily due to the high price of imported oil oddly inflating GDP. This certainly doesn't feel like a 3.3% GDP, but rather than go on gut feel, I wondered what other periods of expansion looked like in terms of economic data. If I am going to trash the deflator, I want a more quantitative basis for doing so.
Our question: Does this 3.3% GDP resemble in most economic data points other, similar economic expansions? Or, is this GDP data, as we have argued, merely the result of a modeling flaw?
With the help of Mike Panzner (Financial Armegeddon), we looked at other periods of time when GDP was similar to the Q2 3.3% -- we used any quarter where GDP was between 3.0 - 3.5% as our range. Going back to 1959 (that's all the data available) there were 12 quarters (6.1% of the total) where GDP was greater than 3.0% and less than 3.5%. We then looked at the median Unemployment Rate, NFP (trailing 12 month change), ISM Manufacturing, CPI, PPI, Industrial Production, New Housing Starts, and Consumer Confidence.
To get a better sense of what sort of economy produces a 3.3% GDP -- and to make sure that a single outlier didn't skew the results -- we took the average of the prior 12 months data for each of our 9 key factors.
What were the results? Consider the following: As you can see in the table below, much of the contemporary data is quite simply incongruous with an annual growth rate of 3.3% GDP.
In the past, a 3.3% GDP produced significant growth throughout the economy. Millions of job gains over the prior year versus less than 50,000; robust Industrial production versus essentially flat; Low inflation against high; Expanding ISM versus contracting; Producer prices were stable versus extremely elevated; Average home starts were 50% higher. And consumer confidence was more than double where it is today.
Comparing Current Economic Conditions With the Past: Prior Expansions of 3.0-3.5% GDP
|Economic Data Point||Q2||Latest value||Median prior 12 months|
Chained 2000 Dollars QoQ SAAR
| Unemployment Rate
Total in Labor Force SA
| Nonfarm Payrolls
Total Net Change SA From Year Ago
| ISM Manufacturing
Urban Consumers YoY NSA
Finished Goods Total YoY NSA
| Industrial Production
YoY 2002=100 SA
| New Home Starts
Privately Owned Housing Units Started Total SAAR
| Consumer Confidence
Conference Board SA 1985=100*
Q1 1959 - Q1 2008 = 197 quarters There were 12 quarters (6.1% of the total) over that span where GDP was greater than 3.0% and less than 3.5%. Note: where data is generated monthly, the value given is for the last month of the relevant quarter (*Only 10 quarters of data; series began Q1 1967).
Yes, high Oil prices contributed to the revised Q2 GDP data. No, this is not a "Goldilocks economy." The bottom line is that if this is a legitimate 3+% GDP, it is one of the worst economies ever to generate that data point since the US began recording its economic history.
Regardless of how we manage to generate a 3.3% GDP number, the table above makes it pretty clear: This is not your father's 3.3% economy.
Is GDP (via BEA) Measuring Growth or Inflation? (August 2008)
What Conspiracy? (June 2008)
Deflator Inflator ! (September 2008)
GDP Deflator versus CPI (August 2008)
GDP: Lowest Inflation Rate in 5 Years (August 2008)
Can You Break A Quadrillion ?
My South African friend, Prieur du Pleissis, shows us an insane check for a quadrillion and some odd change. Of course, its from Zimbabwe.
A quadrillion is a thousand trillion.
Inflation, Zimbabwe Style (June 2008)
Zimbabwe's Million-Percent Inflation (July 2008)
Z$100B Note (July 2008)