There is often a short to intermediate term disconnect between the market and the economy, but rarely is it so great as it is now, and for reasons it is now. Don’t fight the Fed had a different meaning the past few decades when it was a matter of pumping the economy via lower rates, but outright flooding of the financial sector with dollars to manipulate asset prices upward is a whole ‘notha animal. A reader made a great comment about a week ago – he said at least during QE1 people were buying stocks on the Kool Aid that a “V” shaped recovery was in the offing and employment would be surging in 2010 (remember all that talk about how a spike in temporary workers SURELY will lead to a surge in full time?) – and we’d back to ‘normal’ soon enough. But this time around people are bidding up risk assets without any delusion things will get materially better – because who really cares about the economy anymore? As I said about 3-4 weeks ago, go forward through QE2 you just have to hear the economic data, digest it momentarily, but mostly ignore it. Until the market cares again about it again that is.
The very well respected Jan Hatzius (he of the vampire squid) is laying out 2 scenarios for the economy in the next 6 to 9 months – either “bad” or “very bad”. I am surprising the market was not up 2% on the news because that means either “a very long QE2” or “QE2, QE3, and QE4”. What’s not to love?
I will point out some positives … for the debtor class at least. Mortgages are at an unheard of 4.25% on the 30 year. I joked about 2 years ago that things would get so desperate the Fed would try to drive down rates to 3.5% on the 30 year… this was at a time rates were probably near 5%ish. It was a joke – not a prediction. Now??? Who knows!
The other not much discussed item is the foreclosure moratorium we see happening in 23 states due to “robo signing” (I love our financial oligarchs! Always trying to cut corners even as we hand them nearly risk free profits).. Congress is out this morning with some members calling for a national moratorium on foreclosures… just in time for election season of course. Whether it is national or 23 states … however long it lasts is going to be a boon to consumer spending. So when you see the surge in the coming months don’t say anything about countless additional millions not making a mortgage payment – just sing “recovery” and buy stocks. The ‘strategic default’ stimulus – which I introduced almost a year ago, well ahead of the masses, [Nov 25, 2009: America’s Stealth Stimulus Plan; Allowing It’s Home “Owners” to be Deadbeats] will only spasmatically grow even more in a temporary moratorium. That’s millions of people more who no longer need to make a payment on their mortgages and can go Christmas shop, get some new granite countertops, buy that new Harley they deserve, or take a cruise. I’ve said the worst thing that can happen to this economy is people are foreclosed upon because these millions of households living mortgage free are goosing spending figures. The longer the banks lie about what is on their balance sheet by not foreclosing the better for Cramerica. So with their claims in limbo, the ponzi economy gets a new turbocharged boost. So it isn’t so bad after all Jan!
By the way, since the recession “ended” summer 2009, by definition we cannot have a double dip as there are too many quarters of “non recession” between then and any future recession. So the next one would be “new”. Unless of course you live near Manhattan, near Washington D.C., the farming Midwest, or Texas, are a weekly shopper at Tiffany’s or are a public worker – at which point you most likely are still trying to figure out what recovery exactly we are enjoying.
Goldman Sachs Group Inc. said the U.S. economy is likely to be “fairly bad” or “very bad” over the next six to nine months. “We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession.”
The “fairly bad” outlook for slow growth and rising unemployment without a recession will probably be the one that occurs, the e-mail said.
Hatzius’ note reiterated comments he made yesterday at a forum in Washington, when he placed the odds of a renewed recession at 25 percent to 30 percent. He told reporters that was up from 15 percent to 20 percent at the start of the year.
Another $1 trillion of asset purchases by the Fed would probably lower long-term interest rates by about 0.25 percentage point, adding a “few tenths of additional GDP growth,” he said yesterday.