The markets have rallied since Fed Chairman Ben Bernanke spoke outside the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, last week. He did not offer a new quantitative easing program, as expected, but he did pin the tail on the donkey, by which I meant he said the onus is on Obama and Congress to act swiftly to aid the recovery.
He’s right, and he also was right to state that there needs to be a delicate balance between enough fiscal stimulus and prudent spending. Good luck with that.
A lot of attention is going to be placed in the next month on a jobs speech from the president next week, and after that, people will be focused on the Super Committee in Congress that is charged with deficit reduction.
My expectation is that the Super Committee will be a political disaster. I really hope I am proven wrong, but the members are far apart in ideology and focus and watching them work will be a very scary civics lesson. You will just not want to let your children watch that mess.
Some members on the committee are dedicated spenders who think that redistribution of taxpayer money is a form of social justice. Others are highly partisan in the opposite direction. Members will try to protect their personal turfs, and the grand bargain will be elusive. It could be a horror show.
That puts even more pressure than usual on the president to get his side of the politics right, or the equity and credit markets are going to be hopping mad come autumn.
The main positive idea that’s been floated is a housing initiative that would allow people to refinance their homes at current interest rates, around 4%, even if they lack much equity. I love this idea, but officials have been trying to work out the details for months without success.
I am told that around 750,000 permanent mortgage modifications have been done, which sounds like a lot, but it’s really just a start. Bankers estimate there are 5.5 million mortgages currently in foreclosure or tied up in bankruptcy. CoreLogic has said that nearly 11 million homes are currently valued below their current mortgage. That’s about 20% of U.S. homeowners, analysts say. How do these people refinance responsibly?
This gets to the heart of the problem with housing. Home affordability is at its best levels in decades after prices have fallen by a third in many regions, and mortgages are dirt cheap. The problem is not prices or rates, but that there are not enough people with good jobs to buy homes.
That means a really comprehensive program to sop up the inventory and get people into homes will take a massive, expensive effort along the lines of the Resolution Trust Corporation of the early 1990s. Perhaps you could perceive of the government issuing bonds that are bought by the Fed, and the money is used to help people buy homes at ultra-low rates.
That would be very expensive, but if you think about it, letting home prices deflate by another 30% would be even more expensive — even crippling.
The president has to deliver a proposal next week that is surprising, awesome, workable and which he pledges to put his whole body and soul into. He can do it. He’s capable.
Short of something credible along those lines, equity and credit markets are going to trade off and hard — and the August lows will be a distant memory in the rear-view mirror.
In the meantime, I am more hopeful of a recovery from the August crush than ever. We learned in mid-August that the Fed plans to keep interest rates at zero for two years at least. And last week, Federal Reserve board members seemed to be competing to appear even more dovish than that. Dennis Lockhart, head of the Federal Reserve Bank of Atlanta, said it was possible for the Fed to extend the low rate beyond two years if required, and that downside risks to the U.S. economy have risen. That followed the dovish comments from Fed biggies Evans and Kocherlakota earlier in the week.
Plus, business is just not that bad. I read a lot of press releases. (Sorry, I’m a business news geek, I can’t help it.) I noticed on Wednesday that the Obama administration is helping Northrop Grumman (NYSE:NOC) sell a Global Hawk system to South Korea. Officials told Reuters that the South Korea may buy four RQ-4 Global Hawk Block 30 drones, and if a deal is signed this year, they could be delivered in 2014. They added that Japan, Singapore, and Australia are interested in the system.
Meanwhile, Raytheon (NYSE:RTN) reported that it received more than $700 million in contracts from the Defense Department for a big box of missiles, including 234 Advanced Medium Range Air-to-Air Missile Air Intercept Missiles; four AIM-120D air vehicles instrumented; eight integrated test vehicles; 101 AIM-120D Captive Air Training Missiles , and logistics support for the Phalanx Close-In-Weapon Systems. This announcement involved sales to the governments of Australia, United Kingdom, New Zealand, Japan, Poland, and Bahrain, which will be issued separate delivery orders.
See, we still make some great stuff: unmanned surveillance planes, jet fighters and other war materiel is made-in-USA equipment that does not get its due on business pages, but it’s real and deals are getting done.
Everyone seems to be so bearish on September, and can recite reams of statistics about how horrible the month normally is. Can the market really tank when everyone expects it to? Yes. But it becomes incrementally less likely because expectations are low.
What would change my mind? Only if the ECRI Weekly Leading Index continues to fall off a cliff and Lakshman Achuthan declares that the WLI is forecasting a recession. Until then, we will remain in “worrisome but near-miss” country.
Let’s hope the data remains firm and that by the end of the year, the big divot in August turns out to be just a run-of-the-mill “recession scare” exacerbated by European sovereign debt — and not the start of a new bear market.