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Mortgage and Treasury rates
have stayed within a tight range for six-straight weeks: 5.875% to 6.25%
and 3.70% to 3.92% respectively.
Given the lurching in other
markets, the credit market stability may seem other-worldly, but it is not
-- recent bond trading accurately reflects the current economy. We are
still stumbling forward, avoiding one open manhole after another. The
cardinal indicator: the labor market is still intact, no waves of layoffs,
new claims for unemployment insurance just as steady as interest rates.
The Fed knocked 1% off its prior GDP forecast, down to a range of
0.3%-1.2% for the remainder of 2008.
The unprecedented mix of oil, inflation risk, housing recession, credit
crunch, and explosive growth overseas has turned normal economic
discussion -- the search for centerline probability -- into a freak show.
Back to the center, here, in
three parts beginning with oil. Markets have had it right since oil first
jumped the forty-buck fence in 2004: price increases will slow the US
economy, and that slowing will cancel the inflation threat. In the ’73-’74
and ’78-’81 spikes the US immediately went to wage-price spiral, inflation
each time to 11.8%; in ’90-’91 only to 5.5%. No spiral this time: foreign
competition has capped wages, and as in ‘90-‘91 the Fed has kept clamps on
money.
This oil spike is not as damaging as the ’73-’74 run from $3/bbl to
$12/bbl, nor the ‘78-’81 trebling from $14 to $38. Oil has tripled this
time, too, but new GDP today requires less than half the energy as then,
and we are vastly wealthier -- that vast increase, of course, is the main
reason that oil is up so far. We can afford to pay, as can overseas
competitors that we have never had before.
To those who protest in pain:
go find an old person and ask what it was like, twice in one ten-year span
to wait in a mile-long line, pushing your car to be able to buy the
5-gallon limit. Have a look at the tattered, 35-year old solar panels on
tract homes. Ask where those carpools went, and why HOV lanes require only
two bodies.
Then inflation. Last week’s
worst contribution came from Bill Gross, Poobah and Oracle of PIMCO. He
announced (again) that US CPI numbers are fraudulent, and he is certain
because inflation is high in other countries and so must be here. Beware
of irresponsible twaddle from those who should be leading. His trump card:
the 30% drop in the dollar must be the result of inflation. It is not, of
course: it is the result of hosing $650 billion overseas in our annual
excess of imports over exports.
The Fed is playing a very
dangerous game exceptionally well. Inflation is under control here because
the Fed is allowing the crunch, oil and housing effects to slow the
economy, refusing to print money, and allowing us to suffer the
consequences of unspeakably stupid public policies. If the economy slips
into real recession, this Fed looks tough enough to let us find our own
way out, and not try to print us out.
Housing. Center! Any
home-price report containing the words “average,” “median,” “Case-Shiller,”
or “Zillow” without qualification is an intentional effort to mislead.
Hysteria sells. The national home market has shifted its mix of sales to
lower-price ranges, and the portion of distressed sales has increased
(1.45 million foreclosures will do that), thus each of the approaches
above overstates the decline in prices.
However, the brand-new OFHEO
data for Q1’08, appraisal-based and weighted-average, is disturbing. Its
state-by-state listing (p 19-20, HPI) for the first time shows a
nationwide stall. Only two states (Colorado and Indiana) enjoyed as much
as 1% appreciation in the quarter. Only six states had price declines of
1% or more, but to have the whole USA go flat... that’s fragile.
Causes include slowdown and
energy-crimped budgets, and certainly overshot prices in the Bubble Zones,
but we think the unifying downward force is the inadequate and still
shrinking supply of mortgage credit. There are non-inflationary fixes for
that problem, all eluding policy makers for ten months. We are running out
of time.
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