House Oversight — Estate records
HOUSE_OVERSIGHT_024132
Microsoft Word - 03-15-2012 - EOTM - What a diff'rence a day makes
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March 15, 2012 Topics: Is US data as good as it looks? Is Chinese data as bad as it looks? Is European data as bizarre as it looks? What a diff’rence a day makes. Ever since the ECB giftwrapped 650 billion Euros for EU banks, the news has been pretty good, particularly in the US. Most of the market’s focus is on the US consumer, for the simple reason that US households are the largest single economic force in the world (see table). Even after deconstructing the labor report for signs of false positives 1 , the message is clear: US job markets are gradually getting better, and so is spending. The capital position of US banks is in good shape 2 , so we expect access to credit to remain easy 3 . A US GDP growth rate of 2.25% is still below trend, but a long way from the unavoidable recession articulated by the ECRI last fall. I agree with those who think the US economy could not withstand a withdrawal of stimulus right now, but I also do not see the Fed actively withdrawing it. Whatever rain dance the Fed is doing to keep inflation low, they better keep doing it. A chart I saw on the history of jobless claims (below, left) was meant to show how good things may get. In the prior 3 business cycles, when continuing claims fell through 2.2% of the labor force (1982, 1993, 2003), it was a great time to add risk in portfolios. Improving claims signaled that the business cycle was picking up enough steam to be self-sustaining, and last week, the US crossed through this barrier again. But as Big Bird used to say, one of these things is not like the other: the US primary budget deficit which supports this recovery is a bigger now. So, the US economy better improve markedly in order to pay the freight. When will this chart on the primary deficit (below, right) matter to financial markets? Only when it becomes a binding constraint, either due to a lack of demand to finance the deficit at current yields, or due to the economic cost of closing it. The timing is uncertain, given Ce […]