Baum on Money: Goodbye Bernanke, Hello Taper? – Bloomberg 12-16-13

Salient to Investors:

Caroline Baum writes:

  • Bernanke deserves credit for stabilizing the economy during the financial crisis after failing to identity the implications of the subprime crisis. The US outperformed the rest of the world in large part because of the Fed’s aggressive monetary policies.
  • The Wall Street Journal says only two of the Fed’s three preconditions for tapering have been met. 11 of 43 economists polled by the Journal expect tapering this week, 30 expect early next year.
  • Larry Summers’ ‘secular stagnation’ is a phrase that needs to be strangled before it multiplies.
  • Stanley Fischer is one of the few who understands that central bankers cannot be transparent when it comes to an uncertain future.
  • The Murray-Ryan budget deal does nothing to address the nation’s long-term fiscal problems and while muddling through is fine for now, there’s always the risk that a crisis imposed by outside events forces the changes that are needed.

Read the full article at http://www.bloomberg.com/news/2013-12-16/baum-on-money-goodbye-bernanke-hello-taper-.html

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Baum’s View on Money – Bloomberg 08-30-13

Salient to Investors:

Caroline Baum writes:

C. Fred Bergsten says Sweden combines a social welfare society with a free-market economy and a high degree of government efficiency: nearly two-thirds of Swedes confirm by phone that the tax form prepared for them by authorities is correct.

Michael McDonald at Bloomberg News says that Summers, as president of Harvard, used interest-rate swaps to lock in a low rate for financing a science complex.

Felix Salmon at Reuters says Summers would be the most political Fed chair in living memory: he has spent most of the past 5 years doing everything in his power to shape and advance Obama’s agenda.

 The top 5 economic blogs are: Conscience of a Liberal (Paul Krugman), Economix, FT Alphaville, Vox and Marginal Revolution.

Read the full article at http://www.bloomberg.com/news/2013-08-30/baum-s-view-on-money.html

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Fed Gains Nothing With Taper Delay – Bloomberg 08-28-13

Salient to Investors:

Caroline Baum writes:

 

Tapering seems fully priced into the market, and time is not on the Fed’s side.

Vince Reinhart at Morgan Stanley said Fed officials have already paid a high price in terms of market volatility for showing their desire to end QE.

Long-term interest rates are not about to retreat if the Fed delays tapering until October or December.

Jim Glassman at JPMorgan Chase says real long-term rates averaged 2 percent to 2.5 percent before the recession and QE, and the implied 5-yr forward real rate of 1.75 percent shows much of the adjustment in interest-rate markets has been done already.

There is really no quantitative difference between an increase in non-farm payrolls of 162,000 and 199,000. The jobless rate is being driven as much by declining labor-force participation as new hiring

Read the full article at http://www.bloomberg.com/news/2013-08-28/fed-gains-nothing-with-taper-delay.html

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Fed Gains Nothing With Taper Delay

Five Reasons Housing Isn’t Ready to Drop Dead – Bloomberg 08-28-13

Salient to Investors:

Caroline Baum writes:

The residential real-estate market has just got going and only in the last 2 years has residential investment contributed in any significant way to economic growth.

July single-family housing starts of an annual rate of 591,000 is a long way from the peak of 1.8 million in 2006. The median time on the market for completed homes was 3.5 months, typical of the bubble years, so softer sales are a reflection of supply constraints.

4.6 percent is a pretty good rate for a 30-year mortgage: the early 1980s saw rates of 15 percent or more. The inability of many potential homeowners to qualify for a mortgage is still a bigger issue than rates.

Consultant Michael Carliner says that after years of falling mortgage rates, the first move off the lows tends to energize the fence-sitters more than deter potential buyers, and builders are not stuck with a lot of unsold homes. Carliner says house prices are rebounding from lows that were depressed by the large share of distressed sales and relative to 2007, prices are not that high.

The NAHB Housing Market Index leads the pack in both timing and predictive ability. This months reading of 59 is the highest since 2005. The S&P Supercomposite Homebuilding Index is down 29 percent since its peak in May 2013, technically a bear market: but the stock market has a habit of overpredicting recessions.

There are regional construction labor shortages in hot markets such as Seattle and Phoenix, and there are 2 million fewer construction workers today than at the 2006 peak.

Read the full article at http://www.bloomberg.com/news/2013-08-28/five-reasons-housing-isn-t-ready-to-drop-dead.html

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Academics Need a Visit to the Real World – Bloomberg 08-26-13

Salient to Investors:

Caroline Baum writes:

Arvind Krishnamurthy at Northwestern and Annette Vissing-Jorgensen at Berkeley found that Treasury purchases themselves have had limited beneficial spillovers to private borrowers, i.e. the Treasury was able to borrow at lower interest rates but not the rest of us. The researchers found that the purchase of mortgage-backed securities had a bigger impact, so recommend Treasury purchases could be stopped without any untoward effects while purchases of MBS should be the last part to be discontinued.

However, emerging-markets debt and equity markets have gyrated since May, while the 30-year fixed-rate mortgages spiked 1.25 percent. And most economists, including those at the Fed, believe the Fed should get out of the credit business and get back to a Treasuries-only policy.

Jim Bianco at Bianco Research is right when he says the Fed has been perfectly clear about tapering – they have no clue, and we have no clue.

In an econometric model, uncertainty about the future cannot be captured in an equation.

Read the full article at http://www.bloomberg.com/news/2013-08-26/academics-need-a-visit-to-the-real-world-.html

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Word to Fed: Less Talk, More Action – Bloomberg 08-21-13

Salient to Investors:

Caroline Baum  writes:

Markets all along understood that tapering and raising the federal funds rate were two different animals.

Central bankers have fallen in love with their own voices, and communication has become a policy tool.

Benn Steil at the Council on Foreign Relations said new BoE Governor Mark Carney’s debut with “forward garble” was a flop earlier this month as UK stocks fell, gilts fell and sterling rose. The Fed should listen up and talk less.

Read the full article at http://www.bloomberg.com/news/2013-08-21/word-to-fed-less-talk-more-action.html

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Ivory Tower Types Fall for Bigger Inflation Fix – Bloomberg 08-21-13

Salient to Investors:

Caroline Baum writes:

The bad idea that the Fed could “fix” things faster with more inflation keeps popping up in academic circles: Kenneth Rogoff of Harvard in December 2008, followed by Greg Mankiw of Harvard, Olivier Blanchard at the IMF in 2010.

Noah Smith advocates inflation of 4 percent to 5 percent for the next decade, with the only downside to higher inflation being the “nuisance cost” of changing prices.

Kenneth Rogoff of Harvard says if the Fed or any central bank raises its inflation target, that would lift inflation expectations and reduce short and intermediate-term real rates, and in theory would not affect real long-term rates. Rogoff says 2 years of 6 percent inflation would speed the deleveraging process.

However, almost 5 years of zero-percent interest rates, large-scale asset purchases and forward guidance has not enable the Fed to even hit its 2 percent target from below.  And why would central bankers, who have fought hard to earn credibility with financial markets, forgo that trust for short-term gains?

In the real world, bond investors would look at 6 percent inflation and project 8 percent or 10 percent, so nominal bond yields would rise and long-term rates are what matter for capital investment.

Marvin Goodfriend at Carnegie Mellon said it is a slippery slope to do something for short-term purposes today, then do it again for short-run purposes. But Goodfriend says the idea of raising the inflation target has no traction among central bankers.

Read the full article at http://www.bloomberg.com/news/2013-08-21/ivory-tower-types-fall-for-bigger-inflation-fix.html

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Krugman Tries to Bury Friedman, Buries Himself – Bloomberg 08-14-13

Salient to Investors:

Caroline Baum writes:

Paul Krugman at Princeton says Milton Friedman has virtually vanished from the policy discourse and a few decades from now, historians will regard him as little more than an economic footnote. I believe Krugman,  not Friedman, will end up as the footnote.

Krugman’s claim that the post-2008 period demonstrates that monetary policy is ineffective when interest rates are close to zero and that fiscal policy saved the day is wrong, and the evidence suggests just the opposite.

The FRB of San Francisco said the results of federal fiscal policy more expansionary than since the Great Depression were lousy and the Fed is mostly to blame. Fiscal policy gets its bang from monetary policy, and monetary policy was still tight when the economy slipped into recession in December 2007. Government spending, without expansionary monetary policy, is just a transfer of resources from one party to the next.

The federal deficit started to shrink in mid-2010 and is falling fast now. This time, the Fed was proactive, offsetting the effect with asset purchases. Forecasts of dire consequences from automatic spending cuts have failed to materialize.

David Beckworth at Western Kentucky University said continued economic growth in the face of contractionary fiscal policy is one big piece of evidence that monetary policy is effective at the zero bound. Beckworth says unconventional monetary policy in the face of contractionary fiscal policy is the reason why the US is outperforming Europe

M2 never collapsed during or after the recent recession, as it did in the early years of the Great Depression. In Japan’s two lost decades the Bank of Japan never committed to a permanent increase of the monetary base. The BOJ is finally following Friedman’s advice and is committed to doubling the monetary base. Europe’s tepid recovery and fallback into recession shows that money matters.

Michael Bordo at the Center for Monetary and Financial History said Friedman was a pragmatist and said the US needed an authority to set the nominal anchor for the dollar and act as a lender of last resort.

Friedman believed a monetary standard provided a degree of certainty and that deposit insurance was key to preventing 1930s-style bank runs. Robert Hetzel at the FRB of Richmond said Friedman was basically a free-market guy for the non-financial sector and not a free-banking guy.

Read the full article at  http://www.bloomberg.com/news/2013-08-14/krugman-tries-to-bury-friedman-buries-himself.html

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Baum’s Views on Money – Bloomberg 08-08-13

Salient to Investors:

Caroline Baum  writes:

  • Health-care spending has collapsed in most developed nations, not just the US. But as more people get health insurance, the demand for medical care will go up, and with it the price.
  • If Fed talk of tapering was enough to send 10-yr Treasury yields soaring 1 percent, imagine what actual tapering will do. Richard Koo  at Nomura Research says the Fed will need help.

Read the full article at  http://www.bloomberg.com/news/2013-08-08/baum-s-views-on-money.html

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A User’s Guide to Obama’s Inside-Out Economics – Bloomberg 08-07-13

Salient to Investors:

Caroline Baum writes:

Obama is great when it comes to platitudes but less adept at outlining the policies needed to achieve those goals.

Robert Litan at Bloomberg Government said Obama would like all employers to pay efficiency wages, but does not have an executive order to do that.

It is individuals with ideas that raise our standard of living. Productivity growth comes from new technologies.

The path of wealth creation is top down, not inside out.

The top 1 percent were not responsible for the lax lending standards and subprime loans that were the cause of the financial crisis. Income inequality contributed to the bubble.

Raghuram Rajan at the Reserve Bank of India wrote that lower and middle-income households reacted to stagnant real incomes by taking on more debt. What they could not afford, they bought on credit. Rajan said the policy response was to encourage lower lending standards and promote affordable housing.

Obama boasts that the deficit is falling at the fastest pace in 60 years, but this ignores the relentless rise in debt as a share of the economy. Unless the federal government raises revenue and/or cuts spending over the next decade, there will be steep cuts to programs such as Social Security and Medicare.

Read the full article at  http://www.bloomberg.com/news/2013-08-07/a-user-s-guide-to-obama-s-inside-out-economics-caroline.html

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