Wednesday, November 26, 2008

Economic Data to Go With Your Turkey

In honor of the impending Thanksgiving Holiday, I have vowed not to insert the words "the worst level since [pick a year that was a long time ago]" after every economic number I report.  Instead, I will report the facts followed by some commentary.  First the bad news:
  • Mortgage interest rates fell dramatically yesterday on the heels of the Fed's announcement that it would purchase $600 billion in GSE direct debt and MBS.  This is great news for anyone looking to refinance or purchase a home.  The Wall Street Journal reported anecdotal evidence of a surge in refinancing efforts yesterday.  We'll see the actual data when the MBA refinance index is reported.
Yesterday's economic data pointed to continued declines in home prices via the Case-Schiller index, which showed that prices were off 16.6% year-over-year in the third quarter and 21% from the peak.  Third quarter GDP was revised down from an initial estimate of 0.3% to 0.5%.  Also, the FDIC reported that the number of problem banks increased to 171 from 117 in the quarter.

In summary, the economic data is very weak.  But, the Fed and the Treasury have put the printing presses in high gear, hoping against hope, that we might avoid a horrible deflationary spiral, like Japan in the 90's.  Then, if we make it out of the deflationary spiral, perhaps they will start to deal with the potential inflationary spiral they have created from all the money printing (such as [pick your favorite Latin American country].)  Economic experts are weighing in everywhere with their opinions about the unintended consequences that will result from the clear path of quantitative easing (like what Japan did in the '90's) that we are on.  

I'm certainly no economist, but I too believe that the unintended consequences of the Fed and Treasury's actions will be many.  Maybe some brilliant economist has predicted what they will be, but nobody knows for certain and surprises will abound.  Perhaps the most interesting part of all of this so far is that despite everything the Fed has done to devalue our currency, investors still view treasuries as the safest investment in the world.  All of the dire predictions about foreign central banks abandoning US treasuries and pushing our interest rates to double digit levels have not come true.  Remarkably, during a period of time when the Treasury is auctioning enormous amounts of debt to fund all of the bailouts, investors are snapping it all up and requiring virtually no return on their investment.  The market is desperate for US treasuries.  Gold hasn't rallied to $3,000 an ounce.  So, what's the story?  Why are investors still believers in the US?  I suspect because the alternative is too grim for any of them to fathom.  A reshuffling of the world financial order, where the full faith and credit of the US is considered a worthless promise, is not something investors are ready to contemplate yet.  That should certainly give every worried American something to be thankful for this holiday season.  On that note, I would like to wish my readers a very Happy Thanksgiving.  


jack said...

what country would you have supplant the US as the world's financial flagship? it'd be like pinch hitting for babe ruth.

Anonymous said...

US Treasury issuance is just ramping up. Most of the recent run up in treasuries appears to be flight to quality (as evidenced by increasing spreads between corporate debt and treasuries). Seems like we have to give this a few months to work itself out.

Anonymous said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.