GDP: 2.5%

First, the bad news: The U.S. economy stunk the joint up in Q2, slowing sharply as inflation continued to climb.

The good news? You’ll have to ask equity traders, who gapped up the market strongly this morning. They apparently see a soft landing coming. The bond market, on the other hand, aggressively bought treasuries, driving the 10 year note below a 5% handle.

Quite frankly, bond traders are more like the adult supervision of markets, while stock jockeys can be likened to hormone addled teenagers. Whenever the markets send conflicting messages, my tendency is to give more weight to the adults than the children. (And I write this as a stock trader).

As previously noted, the Q1 GDP of 5.6% was an aberration, reflecting the one off Q4 ’05 growth numbers of 1.7%. By my estimates, between 30-40% of Q1 GDP was attributable to Q4 push forward caused by the hurricanes.

>

Real GDP

Gdp_q2

Econoday chart courtesy of Barron’s

>ec
Surprisingly this week, numerous Wall Street Economists had raised their GDP estimates, with consensus coming in at 3.2% — despite slowing retail sales, decreased mortgage apps, and cooling home sales.

The Fed’s favorite inflation indicator, the PCE a hot 4.1% (ex food and energy +2.9%).

Consumer spending still accounts for more than two-thirds of GDP, and it was up 2.5%, significantly below Q1’s 4.8%.

The WSJ quoted  University of Maryland business professor Peter Morici , who said: "Higher interest rates, higher oil prices and mounting debt are burdening consumers. With the housing market cooling, consumers are no longer able to use the equity in their homes to finance ever larger purchases of clothes, electronics and other goods and services."

The Journal also noted that "Residential fixed investment, which includes spending on housing, dropped by 6.3%." This was the largest decline since 2000.

The WSJ’s Fed Watcher, Greg Ip, observed "For the Fed, the revisions are, on net, a reason to be more
nervous about inflation. A slower growing economy with more inflation suggests
the speed at which the economy can grow without exceeding capacity limits may be
lower than previously thought."

The Fed’s quandary is now greater than it was: We clearly have inflation pushing through the core rate, while the economy has WSJ’s growing much more slowly. The Fed is now likely to do something very different on August 8th compared with their prior actions: They are now likely to either hold rates steady – or raise ¼ but change the statement significantly. Either way, this tightening cycle is now entering a different phase.

Maybe it finally is the 8th inning.

>

Sources:
U.S. Economy Grew at 2.5% Rate In 2nd Quarter, Commerce Reports
JEFF BATER
WSJ, July 28, 2006 9:22 a.m
http://online.wsj.com/article/SB115408864917920324.html

Revision Shows Weaker Recovery
Greg Ip
WSJ, July 28, 2006 8:55 a.m.
http://online.wsj.com/article/SB115409068555020335.html

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  1. joe commented on Jul 28

    So to be clear: output growth was far worse than expected, inflation far worse than expected, consumer spending slightly better than expected, business investment FELL, which, to put it charitably, is much worse than expected, and yet… equities rally cause the fed will pause. Are “investors” so myopic that they think the fed pausing will save an economy that is heading straight into a recession? Really, is the difference between 5.25 and 5.50 so important that people are missing the warning signs all around them of what’s to come???

    The market has been telling us for the last few weeks that we’re headed into a recession – economically sensitive stocks falling, defensive sectors like pharma and food & beverage rallying, housing stocks getting crushed, etc… – and now the economic data is beginning to confirm it. My only question is whether to continue fading every rally as I have for the last 2 months or wait till the Fed does finally pause in August and fade that last gasp relief rally.

    Thoughts?

  2. kckid816 commented on Jul 28

    the power of denial is an amazing thing.

  3. ss commented on Jul 28

    <>

    You’re joking right?

    You’ve been banging us on the head daily.

    Dust off the ’94 / ’95 playbook Barry. The market is pulling a bootleg option….and the bull’s reciever is wide open…..heading to the endzone.

  4. ss commented on Jul 28

    Joe,

    Pull up a weekly chart of the Trannies, and the DJIA in 1994. You’ll see a breakdown of the Trannies (that was a NON CONFIRMATION), as the DJIA held its “W” double bottom. The same arm waving was going on that Greenspan was heading us off a cliff….until he didn’t.

    Don’t say you weren’t warned.

  5. Alaskan Pete commented on Jul 28

    We are still in end of month mark-up period, some seasonal/cycle strength, etc. Don’t be surprised if (when) the market gives it all back mid week next week or even this afternoon.

    Agree that the bond market are the adults, especially given that the dollar value sloshing around in the bond market dwarfs the stock market by an order of magnitude.

  6. Craig H commented on Jul 28

    The bulls were intent on putting mascara and lipstick on this pig before the market opened regardless of what the numbers were.

    We have an economy that’s slowing, but not fast enough to contain inflation which is being driven by high deficit spending and energy prices approaching their inflation-adjusted highs of the 1970’s .

    ss, are you old enough to have a 1970’s playbook?

  7. ss commented on Jul 28

    When the market realizes the Fed is done, the curve will steepen..short rates will fall and long will rise (slightly).

    Bears hate Goldilocks…she stole their Hummer.

  8. Barry Ritholtz commented on Jul 28

    The 1994 comparo is not a good one. We were in the middle of a major bull market, and 94 was that most elusive of the mythical creatures, the soft landing.

    The better parallel (tho by no means identical) is 1973 — inflation, high oil, unpopular war, low political sentiment, 6 years after a major market top that followed a 20 year bull market.

    I don’rt see the parallels between 1994, but that has been the Bull’s mantra (94! 94! 94!)

  9. void commented on Jul 28

    Regular reader, commenting first time. Great blog.

    Barry, you are sounding more like an economist than a trader/investor.

    There is too much negativity around. Markets have been doing down for 8+ weeks. Guns are sounding around the world. All emerging markets have sold off. Real estate is slowly but surely descending. It seems most of this information is well digested. However the market action is beginning to disconnect from it. There appears to be tradable rally under way. If it can be sustained for a week I think we will see lot of bears convert to partake in it…

    New highs – not any time soon. But 15-20% move in lot of beaten down stocks. Absolutely.

    My 2 cents…

    Full disclosure: Have built significant positions in EWJ & CMVT during the 3 weeks of decline – was in almost cash before so (luckily) escaped the brunt of the decline. And, no real estate assets, renting…. :-) (so u all know where I am coming from)

  10. Alaskan Pete commented on Jul 28

    Whoa! I missed the PCE bit. That’s smokin’. What happened to the leading inflation indicators pointing to easing inflation? Isn’t that Bennie and the Feds’ (Buh buh buh Bennie, Bennie, Bennie and the Jeeeettttts) latest line? (Apologies to Elton).

    Well, I’m sure they are right, it will ease with demand destruction…right after the economy fall down go boom.

    Forgive me, I’m a little punchy this a.m. Kicking the caffeine habit has good and bad sides.

  11. joe commented on Jul 28

    SS, thanks for the heads up. You’re only the 1,345,296th person to try and convince me to look at ’94/’95. There are a million reasons why this tightening cycle is different and only one reason why people think (hope??) it’s the same: cause we were in a tightening phase, the fed paused, and markets rallied. People are hoping that when the fed pauses, markets will take off, and to justify such a hope and convert it to a belief they have sought out evidence to confirm their expectation while ignoring all other evidence that speaks to the contrary. I believe this is called Confirmation Bias. Good luck with that.

  12. Mark commented on Jul 28

    void-

    Barry runs a macro-oriented hedge fund. He is admittedly not a daytrader. If you have been a regular reader then you KNOW or should know that he makes trading calls. That makes him a…. TRADER. So if he is not seizing upon the same opportunities you are then what of it? You have your parameters, he has his.

  13. ss commented on Jul 28

    You can’t see with your eyes wide shut Barry. But I’m glad your faithfull are taking the other side of my trade!

    ’73….similar to today????…where do I start?….Prime rate at 10%…inflation at 10%…I was wearing bell bottoms.

  14. Mark commented on Jul 28

    A/P-

    Elton forgives you but wants you to play “Brown Dirt Cowboy” to his “Captain Fantastic” in return.

  15. Kevin commented on Jul 28

    SS: “You can’t see with your eyes wide shut Barry. But I’m glad your faithfull are taking the other side of my trade!

    ’73….similar to today????…where do I start?….Prime rate at 10%…inflation at 10%…I was wearing bell bottoms.”

    Not to mention that I had hair. Lots of it.

  16. ss commented on Jul 28

    The perma bear logic is consistant. This country sucks, the economy sucks, the dollar sucks, blah blah blah.

    Don’t forget to cover your shorts at S&P 1281…double (trouble) bottom confirmation.

    Denial isn’t a river in Egypt.

    BR 1281 is a good level — but if you were mroe familair with my history/writing, you would know that i am not a perma anything.

    When I got Bullish in October 2002, I was called a perma BULL. I suspect now its the opposite.

    Hey, how was that CapEx spending?

  17. Craig H commented on Jul 28

    I remember 1994. $15 crude. Israel and Arafat sitting down. The U.S. not at war.

    The good old days!

    So the market is going to repeat ’94-’95 because some people think the SPX chart looks vaguely like it did then?

    That’s not technical analysis or fundamental analysis. It’s magical thinking.

  18. DH commented on Jul 28

    Isn’t this most like those historic times of 2004 and 2005? We had a ‘soft patch’ about this time in both of those years right? Didn’t hurt us. Maybe this is different, maybe it’s the continuation of the pattern.

  19. diva commented on Jul 28

    careful out there guys….. current inflation ‘data’ reflect gold in the $500 area….. stay tuned for the $600+ arena (the Fed ain’t gonna like it)
    Bigger troubles ahead……
    (and, a growing, or slowing, economy doesn’t have diddly squat to do with inflation. BB is an idiot if he imagines inflation is anything other than a monetary error…… just as Ron Paul got him to admit, before he went back to his gobbly gook re capacity utilization)
    SPARE ME!!!!!!

  20. BDG123 commented on Jul 28

    I seriously doubt Ben Bernanke is an idiot. I don’t know you so I can only surmise, but it might be closer to reality that you may be an idiot if you think he is an idiot.

    The reality? Bernanke and his expertise was likely what the Fed used to save your ass from a repeat of 1929 when they dropped rates well below where they would typically need to be to stimulate a recovery.

  21. edhopper commented on Jul 28

    Housing collapsing = the economy is going into the toilet.
    It’s that simple. I guess to simple for Wall Street.

  22. diva commented on Jul 28

    BDG123…. ye know not of what you speak.
    Go back and read Greenspan’s speech to the economic club of NY on Dec 19th 02.
    And, don’t forget….. BB’s PhD dissertation, his ‘claim to fame’ is all based on a false premise.
    He is a nice smart South Carolina boy….. just like my hubby. He is just seriously ~mistaken~.
    His blind spot could be a major problem. We shall see.
    PS: you too can watch all of the CPI and PCE data continue UP for the rest of the year….. cause this is already ‘baked in the cake’.
    Trust me.
    What’s a ‘poor Fed’ to do!?

  23. Cherry commented on Jul 28

    I look for Bernanke led FED to raise rates 50 basis points in Augest, leading to a 10% correction over night lol!!!!!

  24. BDG123 commented on Jul 28

    I have no doubt YOU are seriously mistaken. It’s funny how you believe the Fed, BB and the legions of brilliant people. models, business inputs they use which you would likely not even understand, and yet you are confident he is sadly mistaken. Uh huh.

    If you think BB or any Fed official is going to stand up in public or before Congress and tell you what they are really doing, you must be kidding. So, in 2001 when they were shitting their pants, they were going to tell you why they dropped rates to 1%? To stop a great depression? Oh, ok. That would create a self fulfilling prophecy and panic extradordinaire. The Fed’s public speaking policy is to instill confidence not to create a panic. You believe you divine his lack of intellect because his public statements are reserved. Hardly.

    I could present a counter argument for every argument you would care to make yet I won’t waste my time because you’ve proven your intellectual capacity. You are surely the world’s smartest person.

    These squawkers who say the Fed caused the bubble in 2000 are simply assinine. The response to 2000 caused tremendous imbalances but what would you have done? Squeezed down the money supply, left rates high and started a deflationary spiral that would last the better part of twenty years? That may ultimately happen regardless but frankly the Fed did the only thing they could do. Did they create dislocations because of their policy? Yes they did. Are they as bad as a deflationary outcome? Hardly. I’ll take inflation over deflation any day. You want the 1970s or the 1930s? Ultimately, this experiment may fail but if they pull this off, it will be used as a model for the next century.

  25. ss commented on Jul 28

    Memo to perma bears…take a peek at my little friend BKX. See your future!

    Double bottom confirmed.

    That light in the tunnel is not a train coming at you.

  26. MarkC commented on Jul 28

    “BB is an idiot if he imagines inflation is anything other than a monetary error…… just as Ron Paul got him to admit, before he went back to his gobbly gook”

    I’m impressed Diva. I also caught BB’s testimony.

    This confirmed for me that BB (and the lesser feddies) are NOT idiots. They KNOW whats going on. They began as “scientists” but have been reduced to politicians. The ill effects of they’re experiments in re-animation have so far been offset by globalization. But the jig is up. Enter the monster…

  27. S commented on Jul 28

    The following commentary from Legg Mason discusses two technical “buy signals” for equities that emerged after the May selloff.

    The first signal discussed is that abnormally large spikes in the VIX generally represent good buying opportunties. Most people know about this signal, but for those who don’t it is discussed in the commentary.

    The second indicator discussed is from Ned Davis. I personally hadn’t seen it discussed before so I found it interesting. And it is very simple: buy the market after we experience two days in which advancers outpace decliners by a 9:1 margin within a 3 month period, with no intervening 9:1 down days. The empirical evidence suggests it has powerful predictive qualities. See the table on the last page of the commentary for its reliabilty and how the market performed over certain periods after the signal was triggered.

    http://www.leggmason.com/funds/knowledge/management/June2006MarketCommentary.pdf

  28. Mark commented on Jul 28

    Barry-

    On January 1st I bought the SP500 Index as an investment. It was at 1248. Now it’s at 1277, some 29 points higher. I did okay right? But wait a minute! The inflation statistics coming out tell me that inflation may be running as high as 4%. Hmm. That would mean I need a 52 point bump just to keep up. Maybe not so good. Should I have bought the Index with my “non-core” dollars? I hear they aren’t depreciating as quickly. Can someone help me? This is all so confusing.

  29. advsys commented on Jul 28

    s this not the most feared scenario? Growth is slowing, inflation is on the rise. Is that not the definition of stagflation?

    This could mean that todays rally is short lived once that sinks in?

  30. diva commented on Jul 28

    Dear BDG123
    The Fed (mistakenly) created the deflation of 97 through 02 that was *the* problem. (have you read AG’s 12/19/02 speech yet….. his mea culpa)
    This deflation dragged down the ‘real’ economy and artificially ~enhanced~ the NASDAQ.
    AG finally listened to reason in the fall of 02…. and reflated, and the rest (till now) is history.
    Unfortunately, too much of a good thing is too much.
    So….. we have inflation today.
    The Fed could easily prevent deflation and/or inflation.
    (very easily, as inflation, and deflation, are always, and ONLY monetary events)
    However, they choose to ‘play a different game’.
    WHY do they choose this?
    hmmmm
    politics, I guess.
    Meanwhile…… traders can trade and make a buck.
    However……. ‘real’ people are robbed of their hard earned savings every day.
    WHY?

    And, the poster who made the comment about comparing his gains in the SNP to the increase in the CPI is close to being onto something. (he must remember that the CPI is going to continue UP, so he needs his holdings to hustle)
    What he really should do is compare how many ounces of gold his Jan holdings could buy vs how many ounces his holdings will buy today.
    The Fed has the complete ability to prevent inflation. However, they sure don’t have the ‘political will’.
    The Fed says they shall “slow down the economy” so inflation won’t get too much of a foothold. That is total and utter nonsense. Many folks get to have a poorer economic future…… because, and only because, the Fed is raising rates to s-l-o-w down the economy….. when none of that is necessary!
    The total and utter stupidity of it all drives me batty.
    I can’t believe folks let the Fed get away with this.
    It is criminal behavior to hurt millions of innocent people when it is totally uneccessary.
    The ONLY thing the Fed should be doing is managing monetary policy to maintain a stable value of the $.
    They have failed wide-open at that…… and the ‘fix’ is to hurt everyone else!?
    WRONG
    Only: unless folks start to question this stupidity…… it will continue.
    [cause, those ‘in the know’ can protect themselves to a great degree]
    Sorry about the rotten luck of all the innocent folks who are not ‘in the know’.

    how disgusting is that

  31. ss commented on Jul 28

    Yes….stagflation! That’s it….run for the hills….short more spoos!

    lol

    …once in a while you get shown the light in the strangest of places if you look at it right.

  32. Jdamon commented on Jul 28

    Now this is what I call good reading. To not see bear after bear after bear post really makes for much more intellectual reading.

    My 2 cents, BB is 100+ times better than Greenspan and he will lead us to a “soft landing”. Good stocks and companies have gotten their arses handed to them for the last 2 1/2 months. P/E’s have compressed as the market has priced in a full blown recession. When it doesn’t come (and it won’t), the market will rally in the 2nd half of the year.

    Question, with all this housing deflation talk going on, when is the last time you actually checked the “value” of your house? Do you really think most people in America bought their house as an investment vehicle? Do you think they still can’t access (or won’t acccess) HEL’s to do fix up’s/refurbishments if they plan to stay in their house for 10 – 15 year? Wages are moving up enough for most folks to keep up with their expenses.

    The doom and gloom around here (before today) was more than I could “bear” at times. Thanks SS and others for your insights.

    BR Yes, there’s an excess of gloom, as the market gaps up and never looks back.

    Here’s how gloomy it was:

    Dow 11219.70 +119.27 (+1.07%)
    Nasdaq 2094.14 +39.67 (+1.93%)
    S&P 500 1278.55 +15.35 (+1.22

    You’re entitled to your opinion, but if your reason for going long was today’s “excess gloom,” you want to rethink your rationale.

  33. Jdamon commented on Jul 28

    Diva –

    I am new to this, so can you explain how the Fed maintains the value of the $ without raising interest rate? Print less money?

    I do agree AG made a huge mistake and hurt a bunch of people BADLY by not raising rates more aggresively in 1997 – 1999. The Tech Wreck wiped out $7 trillion from hard working, good, solid Americans. AG was incompetent in the end.

  34. ss commented on Jul 28

    Jdam…..shhhhh. This is the cult of the bear.

    Do people wonder what percentage of houses on the market are “would like to sell (at my price)” vs I HAVE to sell? The drive by media, and perma bear blog sites have scared people into the current state.

    Is the housing market ahead of itself, after underperfoming for decades?…you bettcha. So what.

  35. BDG123 commented on Jul 28

    Diva,
    WTF kind of gibberish is that? Don’t expect alot of mercy when you start labeling Bernanke as an idiot. First off your thoughts are unintelligible chicken scratch. Secondly, I see you did not pass the English Language and Composition exam get your English degree from Harvard or MIT so you’ve likely never met Bernanke as he has spent much of his life at these two institutions. You are calling Bernanke an idiot? That’s a riot.

    Pricking the stock bubble in the late 1990s would have gone beyond the Fed’s mandate to that of deciding asset prices. Inflation and employment were just fine. The Fed saw the bubble coming and first had documented discussions about it in 1997. Bernanke has already said using monetary policy to decide and control asset prices is an attempt to circumvent free markets and like using a sledge hammer to kill a fly. (His criticism of the Fed’s moves leading into 1929.) You still didn’t answer my question. What should have the Fed done starting in 2001? You want to use the term idiot to decribe Bernanke and the Fed implies you know something they dont. You tell us what you would have done. If you really know what you are talking about, why don’t you tell us what you would have done leading up to 2000 and post 2000. It should be easy because you have the luxury of hindsight unlike what the Fed had.

  36. Cherry commented on Jul 28

    Doom and Gloom? SS doesn’t have “insight”, he has drug induced fantasy. When things go down, they go down. Be realistic and deal.

  37. ss commented on Jul 28

    Cherry,

    See you at 1281….better cover cupcake.

  38. Cherry commented on Jul 28

    Bernanke’s belief on the depression is wrong, as is most peoples.

    It wasn’t FED policy AFTER the speculative bubble burst in 29 that caused the Depression, it was Chairman’s Strong’s FED policy between 22-28 that was the real cause.

  39. Cherry commented on Jul 28

    See you at 900 this fall. The horror, oh, the horror!!!

  40. diva commented on Jul 28

    Jdamon – the Fed is using a very blunt crude instrument by using an operating mechanism of targeting a fed funds rate.
    The Fed did not need to raise rates over the last two years. As a matter of fact, the Fed has created the very inflation they hoped to avoid by raising rates.
    Things would be even worse if we did not have the cap gains and dividend tax cuts to offset some of the Fed’s mistakes.
    The Fed should stop raising rates (which does not directly affect liquidity…… and often reduces the demand for $$…… which decreases the value of every transactional $ already out there……. which is what has been happening ever since the Fed started raising rates…. and is an important reason why inflation is rising now)
    The Fed should be maintaining a supply of $$ = to the demand for $$ (which means the value of the $ would be constant)
    If the value of the $ stays contant……. there is no inflation.
    It really is very simple.
    Too bad the Fed can’t do ‘simple’.
    They seem to need to do ~complicated~ and meanwhile screw up the economy.
    The market has rallied every single time it ‘thinks’ that the Fed is going to STOP.
    The market has been telling the Fed to STOP for months.
    The Fed should have stopped a year ago.
    All the Fed needs to do is to buy/sell bonds to maintain the correct supply vs demand for $$ so the value of the $ stays constant.
    That is all!

  41. BDG123 commented on Jul 28

    I’m tired of typing and this is my last post but I think you need to study a little history if you think the Fed’s policy post 1929 did not exacerbate or even cause the Great Depression. These one liners you guys throw out without any supporting evidence……….tell me……….you really don’t know what you are talking about.

    The Austrian thinking of the time was that people had to take their medicine so the Fed ratcheted down money supply and didn’t do ANYTHING but make it worse. The calls for easier money were unrequited and banks started failing left and right. The Fed, the bank of last resort, didn’t step up to stop anything because the economic consensus was that people had to take their medicine regardless of whether it meant 35% unemployment or a collapse of the banking system.

    We’ll never know what would have happened if the Fed would have used more sophisticated capabilities to actually do something post 1929.

  42. Mark commented on Jul 28

    Okay, time to settle the back and forthing going on. “ss”, if you’ll give Barry a valid name and email address (he has one of mine) I’ll take short the SP500 at 1281, you take long. Dollar a point. Settlement date is Nov 15th. So if SP500 is at 1340 on that date I owe you 59 smackers, etc. On that date Barry emails the loser and tells him/her to pay up. Payment to be received by Barry by the 22nd. Names to be disclosed on this blog and scorn and abuse to be heaped on if loser doesn’t pay. Checks can go to Barry at his Ritholtz Capital Partners address for re-sending. Are you on?

  43. GRL commented on Jul 28

    This comment from Stratfor this morning:

    [T]he [2.5% GDP] number is almost certainly an understatement of actual U.S. growth . . .. Compare that to a “real” number: collected federal tax receipts. Those receipts are up 13 percent for the first nine months of the current fiscal year. The idea that receipts are up so much but growth is only up by 2.5 percent is a bit disingenuous. Commerce will issue its first revision at the end of August.

    The idea that the Fed is done raising rates is similarly wacked. Core inflation rates — a figure that filters out volatile food and energy prices — increased by 2.9 percent in June compared to May, again at an annualized rate. That is the fastest rate of increase in 12 years and well above the Federal Reserve’s comfort level of 2.0 percent. With growth still warm — if not red hot — and inflation robust, the only action available to the Fed is to continue increasing rates. The only question in our mind is whether it will limit itself to just a quarter-point hike at its next meeting.

    http://www.stratfor.com/products/premium/read_article.php?id=270813

    FWIIW, I just unloaded all my high-beta (losing) positions this morning and switched into higher yielding, hopefully lower beta dividend stocks.

    Again, if you don’t subscribe to Stratfor, you should. It’s worth it.

  44. diva commented on Jul 28

    BDG123
    I did not say the Fed should have pricked any bubbles. Please don’t put words into my mouth.
    Further, the deflation started in 97. It continued through 2002. It was the same mistake the entire time.
    The Fed corrected that mistake in Dec of 02.
    Now, we have a new mistake = inflation.
    (over-correction?)
    As long as the Fed uses rates to ‘manage’ monetary policy we will continue to have these problems.
    It does not have to be like this.

    ….no more Fed mistakes…… what a concept!

  45. jkw commented on Jul 28

    B –

    Actually, we might get close to finding out what would have happened. If we start a deflationary cycle similar to 1929 and the Fed reacts differently, we can see how much it matters. Things will always be different of course, but they may be very similar at some point.

    What do you think the Fed should do at this point?

    I think they lost control when they failed to raise lending standards for mortgages a few years ago. Too many people bought houses they can’t afford, and now we either have to inflate wages or accept a large rise in foreclosures which will kill the real estate market and probably significantly cut into consumer spending. I have no idea what would be a good policy now. I just hope that Bernanke knows what he is doing, is willing to change directions as necessary (strong opinions weakly held), and can manage to remain independent of politics so that he can do what he has to do.

  46. T commented on Jul 28

    The housing market /should/ underperform other investments over any long time horizon. Unlike infrastructure, education or corporate investments, sinking savings into housing doesn’t produce any economic returns beyond the short-term gains in homebuilders (and maybe all that energy to heat the McMansion with bay windows).

    Returns from housing over time that outstrip inflation are just a localized form of inflation — spending being shifted from one part of the household wallet to another. Much like that “$7 trillion” that someone referred to as “lost” during 2000, much of the wealth gain Americans perceive from housing isn’t really there either — it’s only good so long as the Chinese keep lending new buyers cheap money and everyone doesn’t try to sell (say, like when the boomers attempt to liquidate to pay for retirement.)

  47. ss commented on Jul 28

    Stratfor needs to stick to their knitting…fantastic geopolitical analysis without the spin. These guys are ex spooks…not economists.

    But you’re right….it is worth it.

  48. ArizonaChartist commented on Jul 28

    Not sure I can wade in here without getting shot. Just would like to throw out some randome thoughts;

    1. Perhaps what we’re seeing in GDP growth is the lagged effect of 17 Fed rate hikes dating back to summer 2004.

    2. As for the inflation data, think J-curve; things get worse before they get better.

    3. Are the stock and bond markets at odds or in agreement? There was a study 5 years ago by some ivory tower types at UNC who published a research article in the Financial Analysts Journal which showed they could forecast odds of a bear market given the relationship between the 3-month T-Bill and the 10-year T-Note. As per their study, given today’s spread there is between a 30% and 40% chance of a bear market in the next 6 months. If the stock market acts as a discounting mechanism, then my interpretation of recent market action is the equity markets are telling us BB is gonna be able to steer us to a soft landing. I further think the bond market is in agreement as long as the yield curve (again as defined by the 3-mo and 1-yr spread) does not invert more than today’s 7 bp inversion. As per the UNC profs, it would take an inversion of >83 bps to get the odds of a bear market above 50%.

  49. AlanG commented on Jul 28

    Ah, its nice to not have BDG123 here.

    So that we don’t have the following logic….

    “I see you did not pass the English Language and Composition exam get your English degree from Harvard or MIT so you’ve likely never met Bernanke as he has spent much of his life at these two institutions. You are calling Bernanke an idiot? That’s a riot”

    I see that you logical reasoning is so poor that your SAT scores would have been in the pit, have you had ANY education ?

    diva calls BB an idiot and makes some econ points. Concentrate on the econ points dude rather than on the “idiot” part

    btw BB is not your father, right ?

  50. Bear Mountain Bull commented on Jul 28

    Kids These Days

    Barry Ritholtz (The Big Picture), on todays reaction to the morning GDP report:
    First, the bad news: The U.S. economy stunk the joint up in Q2, slowing sharply as inflation continued to climb.
    The good news? Youll have to ask equity trade…

  51. Craig H commented on Jul 28

    ss,

    I don’t mean to be rude, but you really have a snarly attitude that is more fitting for the Yahoo message boards. All that anger seems to me to be a manifestation of fear. You need to chill. Bearish sentiment is not a personal attack against you, okay?

    Besides, if you really believe that heavily bearish sentiment readings are bullish you shouldn’t be trying so hard to convert bears to bulls. Bears don’t drive markets down, economic conditions do, and if the conditions drive the market up, the bears will add fuel by covering shorts.

    P.S. – Where’s that 1281 close on the SPX, or 12,258 on DJIA? Why was volume on the DJIA and SPX lower than it was the previous two days? And how about those overbought readings on 5 and 14 day stochastics and some other indicators I use like Zweig Breadth Thrust and New High/New Low?

    As a non-perma-bear, those are all the kind of questions I have to ask myself as I try to game the market’s next major move.

    It’s going to be interesting how traders position themselves next week for the Fed meeting on the 8th.

  52. Alaskan Pete commented on Jul 28

    Few points:

    BDG123, aka “B” is pretty sharp. I’m sure “diva” is smart as well. I am not a Bernanke fan, but will readily concede he is a very intelligent man. You don’t get to his level of academia without being a one man brain trust. I have to disagree with BDG a little about the 30’s. FED policy after the crash certainly exacerbated the depression as BDG states, but loose policy in the lead-up period arguably caused the problem in the first place as Diva states. So maybe BDG AND Diva are both correct and need not argue.

    Soft landing has little, if anything, to do with Bennie & The Feds going forward. At this point I think it’s well out of their hands. The slow motion housing collapse is underway.

    My own view is we see a recession by 2Q-07 (and could already be in one depending on your views of the GDP deflator calcs). Job creation is extremely weak, and the housing related jobs that made up the bulk of new jobs over the last several years are going to evaporate and consumer spending will go with them. Take away the cash-out refi spending and we’ve got a mess(we’ve all seen the chart that shows GDP with and without the refi over the last few years)

    Depending on how fast China and other exploding economies continue to grow, commodity inflation could well continue even with a US recession. But then, with US housing slowing and raw materials (copper, cement, lumber) being used largely in housing…will they crash or does the BRIC growth take up the slack? Then there’s the energy wildcard. Do a US slowdown and improving geopolitical scenarios give a relief to energy prices? There isn’t much spare capacity, but we’re not at peak oil yet. Take away nigeria problems, get Iraqi production back up to snuff and oil goes to $40. If BRIC takes up the slack from a US slowdown, we get stagflation. Would the FED continue to hike in the face of stagflation?

    They’re over a barrel. I believe they (FED+Treasury) want to see a contolled decline of the dollar. A pause or rate cut would exacerbate that process, but it’s questionable how hard the dollar would get hit as long as there is a yield advantage to the yen and euro.

    Such a lovely puzzle. Time will tell. But one thing is pretty clear, US equities are not the place to be.

  53. Mark commented on Jul 28

    A/P-

    I appreciate the defense of BDG aka B. Not only do I respect his posts (even if I disagree with him) I find they always get me thinking.

    I agree with you that the choices for quite some time have been extremely difficult for the Fed. Monday morning quarterbacking here is just that. Unless someone points out a clearer path, it is merely second guessing.

    So we have an oversold bounce followed by an EOM window dressing day. Big deal. Now the markets are slightly OVERBOUGHT. They can rally into the month. Then what? That is the big question.

    BKX breaking out? We have a superb M&A environment. That tends to happen LATE CYCLE, especially among the commodity producers. 1994 redux? I’ll take that trade. That was mid-cycle bull market and this one isn’t. Not by a long shot. JMHO.

  54. ari5000 commented on Jul 28

    There are greater powers than Ben and the U.S. government. Try the collective power of the hedge funds / mutual funds.

    Look at the waves in the Dow and how everything just happened to set up perfectly — picture perfectly — for the powers to be. The Dow was sitting near its low — last Friday on options expiration day. Just what they needed to maximize profits.

    And the very next week — the Dow pushes through everything… including an incredibly crappy GDP report — and finishes at a relative new high — and all the little funds get to publish their brilliant quarterly returns — most of which occurred this very week. God — that’s just sheer beauty. How lucky!!!!!

    Now look at the waves — 10-12 days down / 10-12 days up. Since the ‘double bottom’ — it’s been 10 days up.

    Now you may be a bear or a bull. I just want to make money. But I’m going to assume weakness is about to come on here. If not — that will be a big shock and I will ride the wave instead of staring at my green screen wondering what is going on. But the waves are running in 10-12 days and we’re about out of time…

    The funds run the show. If they want to run it down now before Ben reports, inducing him to pause — well that just seems to make sense, doesn’t it?

    Any bulls out there planning to add to some new positions on Monday? I double dog dare you. See what you get by the next Friday.

    Dow and QQQQs have not made any progress. But wow — I bet Goldman is going to have a banner year with their proprietary funds. Their clients? Not so much.

  55. fred hooper commented on Jul 28

    With all due respect to the really smart people on this blog, can any of the geniuses tell me why BOOZE is never listed as a necessary survival item along with food, water, guns, ammo etc.?

    BTW, edhopper wins the prize on this thread.

    “Housing collapsing = the economy is going into the toilet. It’s that simple. I guess to simple for Wall Street.”

    It really is that simple.. Have a great weekend!

  56. donna commented on Jul 28

    ss is sure happy to offer anonymous advice. Where’s his blog? ;^)

    We come here to read what Barry thinks. Because usually, he gets it right.

  57. fred hooper commented on Jul 28

    AlaskanPete, thanks for outing “B”. I asked what happened to him a few weeks ago and thought BDG123 might be his new moniker. I appreciate insights from both of you, though I may not agree. I’ll probably add the Stratfor sub per B’s recommendation.

    As for the Great Depression disscussion, this timely essay ought to keep some of you occupied for a bit:
    FEDERAL RESERVE FOLLIES: WHAT REALLY STARTED THE GREAT DEPRESSION by Antal E. Fekete:

    http://www.financialsense.com/editorials/fekete/2006/0726.html

    His recent essays on “Bull in Bear’s Skin”, “The Rise and Fall of the Gold Basis” and “The Last Contago in Washington” are also worth reading.

    http://www.financialsense.com/editorials/fekete/main.htm

  58. juan commented on Jul 29

    Ms Diva et ?

    The Friedman quote: ‘inflation is always and everywhere a monetary phenomenon’ says nothing.

    Please do not place so much faith in a highly overstated yet vulgarized version of QTM.
    Please consider that ‘correlation is not causation’ and that Friedman’s axiom, without going into the data mining which that individual engaged in, is – to the extent that causality is implied – very much a post hoc ergo propter hoc fallacy.

    I would suggest as well that you may find the modern credit money system somewhat at odds with simplistic believes in central bank power. The Fed does not/can not control the money supply.

    Yes, I know this runs counter to the commonplace ‘everybody says so therefore it must be so’; yes, this also removes the Fed from its convenient role as scapegoat for all those who refuse to take the time required to at least try to understand the capital system as a whole, so also its inherent contradictions.

  59. BDG123 commented on Jul 29

    I’m glad to see chivalry isn’t dead. Would you guys like to marry? I’ll find a real purdy dress for you to wear.

    Fred, I have mentioned Stratfor on here before when they had a few free stories out there but GRL is the big proponent. Their investment and economic advice is …… lacking. I’d rather have Barry’s service frankly. Maybe he’d give the regular posters a discount for keeping the board lively. Paid posters? :)

  60. fred hooper commented on Jul 29

    “I would suggest as well that you may find the modern credit money system somewhat at odds with simplistic believes in central bank power. The Fed does not/can not control the money supply.”

    OK, they control credit via the reserve required ratio and retail sweep programs, and the bank’s cost of borrowing money to maintain those ratios via the Fed Funds Rate. The monetization of US Treasury debt increases the supply of money. Many years ago, I think they also figured out a way to monetize the $6b debt of Poland. Ha, your dollars were backed by the debt of Poland! Don’t know if it ever got paid. I’m not the brightest bulb but I spend way too much time trying to understand monetary theory and macro stuff so I can make more debt money and convert it to Au, hence my sub to RR&A.

  61. Franco commented on Jul 29

    “…the only action available to the Fed is to continue increasing rates. ”

    I concur. 6% fed funds rate is inevitable.

  62. juan commented on Jul 29

    fred – thanks but after spending so much time have you bothered with real and de facto changes in reserve requirements, aka ‘sweeps’, that kicked in during the early-mid 1990s; have you taken the time to consider what have been the consequences of financial liberalization and with this the much greater size and reach of non-bank banks, to which we must add the credit money creating powers of the GSEs such as fannie and freddie. And still more importantly, the globalization of credit and debt flows. All combined and *interacting* – the Fed does not nor can control these processes.

    The old bank centered system has, in reality, been displaced no matter how much some may desire that not to be so.

    Nevertheless, so long as many retain their *belief* in central bank power it’s, well, handy.

  63. diva commented on Jul 30

    Dear juan,
    Please smell the coffee
    The Fed has absolute and complete and total control over the amount of ‘non-interest bearing debt’ of the Federal govt = cash.
    No body else can create ‘cash’ except the Fed.
    ‘cash’ is needed by the transactional economy. No one holds on to cash…… because it does not pay interest. When folks deposit/invest their ‘cash’ into an interest-bearing instrument….. it is no longer ‘cash’ (non-interest bearing debt)
    The Fed has several different ways it could manage just how much ‘cash’ it provides the economy.
    Today the Federal Open Market Comm uses targeted interest rates to determine how much ‘cash’ to provide. This is a crappy blunt indirect ineffective operating mechanism. There have many different papers written on this…… and published.
    At the end of the day….. the Fed either buys or sells Treasury Bonds to create/extinguish ‘cash’.
    However……. they *could* use a better control mechanism……. if they so chose.
    They do not choose to do so…….. so we all get to go through times of inflation (or deflation as in 97 thru 02)
    This is stupid.
    period
    Inflation and/or deflation are always and only due to poor monetary controls. (by our own dear Fed)
    Welcome to the Feds latest round of inflation.
    Send them a thank-you note!
    (and add a PS to thank them for the next recession that they want to induce in order to reduce the very inflation THEY created)
    I still can’t believe people put up with this crap.

  64. rick commented on Jul 30

    I surely cannot print/destroy any money, I will go to jail,
    the fed is the only one allowed to print money/
    create/withdrawl credit.
    So you are saying the fed has no control over inflation?? where is the logic here ??

  65. zink commented on Jul 30

    The current inflation shouldn’t be a surprise to anyone. Asset and commodity price inflation are the real deal and have predicted the current CPI, PCE, etc for well over a year.

    The Japanese bubble economy is the closest match I can think of for the current US economy. Overvalued real estate, rising interest rates, overvalued equity and bond markets, inflation, and (this is key) an out of control banking sector.

    The market may continue the speculative blowoff for a few days, weeks, or a month. Look how long the NASDAQ ran before it destructed. The futures markets are still in bubble mode, so the Fed shouldn’t even be thinking pause or cut. They let it get out of control, they have to subdue it. Without price stability, we are just treading water and making th end that much worse.

    This market is for trading, not investing. What good is that for the country. None.

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