Economy May Improve 2nd Half

Townhall.com ^ | June 11, 2011 | David Malpass

[Kaslin]

We expect stronger 3.5% U.S. growth in the second half and a market shift from bonds to stocks as auto production picks up, growth in emerging markets remains strong and near-term concerns get resolved -- about QE2 ending, the debt limit increase, a China hard landing and a quick Greek default. (We think they’ll all be resolved favorably, but even unfavorable outcomes are better than the current uncertainty.) 

 

• This year’s soft patch has been exaggerated by the emphasis on the auto sector in the data including ISM, other diffusion indexes, auto sales and industrial production. Jobless claims jumped due to the unique automatic feed from idled auto union workers to initial jobless claim benefits, but claims are still well below the level in the 2010 soft patch.  As full auto production resumes, all those indicators will improve at the same time, exaggerating the upturn. 

 

• This piece makes three points: the soft patch should be less severe than the one in 2010; the market implications are substantial; and some of the panic about the longer-term crisis will probably ease.  We emphasize our view that global financial leaders are aggressively pushing problems past the current expansion cycle (leaving the consequences for the next recession or bear market).  They are kicking the can hard down the road through absorption of debt into the sturdiest sovereigns; transfer of resources from savers to debtors through artificially low interest rates and transfer payments; shortening of U.S. national debt maturity through the QE2 debt buyback; no restraint on U.S. federal debt; unlimited ECB discounting of weak sovereign bonds; and forbearance (delay) in resolving weak debtors like Greece and weaker European banks.

 

The 2011 soft patch should be less severe than the 2010 soft patch.

 

• Over the last three months, exports grew 20.4% on an annualized basis versus a slowdown to a 6.6% rate in the 2010 soft patch.

• On a 13-week annualized basis, large bank lending is up 20%, a sharp contrast with the -10% shrinkage rate during the 2010 soft patch.  Lending by small banks is growing at a 4% rate versus a -3% shrinkage rate during the 2010 soft patch. 
• Aggregate weekly hours, a measure of real growth, rose at a 3.9% quarterly annualized rate in March-May, well above the 2010 soft patch.  Aggregate payrolls, a measure of nominal growth, are rising at a 5.7% quarterly annualized rate in March-May. In the 2010 soft patch, it was only growing at a 3.3% rate by August when the Fed hinted at QE2.   
• Auto inventories are low and falling, versus a build-up during the 2010 soft patch. 
• On June 30, we think QE2 will end quietly like Y2K did – QE2 wasn’t money printing and won’t be missed.  We don’t think the U.S. debt limit will cause financial system problems.  The muni bond default scare has calmed down -- we think there is a crisis in longer-term state finances due to large pension payouts and other factors but don’t agree with the high default estimates that hit 2010. 

• A major concern in the 2010 soft patch was that Germany would not help much with a Greek bail out and thatGreece might exit the euro (which would create a financial Armageddon in our view.)  The euro weakened sharply (see circle in the attached graph), but was less fazed in this year’s soft patch because Germany has taken a clear stand on the future of the euro and has mobilized resources.  We don’t think any euro countries will leave the euro.  The ultimate debt losses for Europeans are large but much of that has been priced in. We expect the ECB to hike rates again in July and think global bond markets will have to start viewing the ECB as the trend setter, not the Fed. 
• In terms of market-based signals: Corporate bond spreads have remained narrow in this year’s soft patch versus the substantial widening in the 2010 soft patch; the Ted spread and LIBOR-OIS spread (measures of market aversion to interbank risk) are moving down, not up as they were in the 2010 soft patch; the equity VIX volatility index is staying calm, not jumping as it was in the 2010 soft patch.  

 

We think bonds are in a bubble and expect sharply higher yields. 

 

• Bond yields are being pushed down by price-indifferent Fed buying, confusion about QE2 ending (since large-scale Fed asset purchases are a radical policy departure), the debt limit uncertainty, the sharp slowdown in growth and Pimco’s announcement of a short-bond position.  Yields should rise as: 1) QE2 finally ends without causing a tightening of monetary policy or a slowdown in money supply growth; 2) the debt limit problem is resolved without Treasury having to stop bond auctions; 3) auto production rises and improves macro indicators; and 4) U.S. CPI inflation rises toward 3.5% in May and June.
• The decline in bond yields in 2010 extended well beyond the soft patch in the economy, benefiting from the Fed’s announcement that it would buy $600 billion at any price. We think this year’s decline in bond yields will end sooner once it becomes clear that the Fed won’t be a new buyer and the growth picture stops deteriorating.  We also think equities won’t correct as much as in the 2010 soft patch (when they fell 16%) because this year’s uncertainties aren’t as dangerous or open-ended as those in 2010.  
• We share many of the complaints about the unsustainability of fiscal, monetary and regulatory policy.  Theissue is whether the expansion is almost over.  We don’t think so.  Inventories are low.  Housing starts can’t get worse.  Extended unemployment insurance is running out. The real Fed funds rate is deeply negative, not a trigger for a near-term slowdown (though we think it is a harmful policy mistake.) Obama’s advisors are talking favorably about a payroll tax cut. There’s pent-up demand for new investment.  Innovation is very strong – in energy, health care, pharmaceuticals, global finance, China’s consumer industry, technology and more.  Given innovation, U.S. and global population and productivity growth, many well-chosen investments in emerging markets in recent years and human nature (to try to earn more tomorrow than today), we think the new norm is closer to 3% than 2% and that will become apparent in the second half. 

[Uncle Ike]

” We expect stronger 3.5% U.S. growth in the second half “

One word (the one that’s become ubiquitous under the current regime) —

“UNEXPECTED”

Just sayin’.....

[KeyLargo]

Chicago Tribune says all you ‘crackers’ are wrong about the Obama economy.

chicagotribune.com

Black hopes vs. white anxiety

Clarence Page

6:44 PM CDT, June 10, 2011

Race relations have undergone a curious flip-flop. Polls show blacks feel more optimistic about the nation’s future than whites, despite the Great Recession that’s giving everybody the blues.

Having a black, or, if you prefer, biracial, president explains a lot of that optimism, polls show. But white Americans, particularly working-class whites without a college diploma, have become more gloomy.

Ronald Brownstein, political director and demographic specialist at the National Journal, recently described whites who have less than a four-year college degree as “the most pessimistic and alienated group in American society.”

He cited a March poll by the Pew Charitable Trusts’ Economic Mobility Project in which two-thirds of blacks and Hispanics said they expected to be better off economically in 10 years. So did 55 percent of college-educated whites. But only 44 percent of non-college whites agreed.

http://www.chicagotribune.com/news/columnists/ct-oped-0612-page-20110610,0,2405310,print.column

[Texas Eagle]

Who is “we”?

[Kaslin]

Isn’t that the truth

[Citizen Tom Paine]

With O being in a re election campaign and the US putting out the statistics, there will be a chicken in every pot and a car in every garage. We will all be eating at the big fish fry provided by O. In the meantime, men and women will be unable to find jobs because of offshoring and who know what gasoline will cost per gallon because of O’s ridiculous energy policies? But the MSM, will paint a rosy picture. You can bet on it.

[reefdiver]

As housing values tank, unemployment rises (un expected?) national debt and spending continue to rise, fuel cost's up, food cost's up and this guy expects that just around the magic corner is a shining star. What's it like to go thru life with your head stuck in your @ss?

[Tigen]

Yea and if my aunt had testicals she,d be my uncle too...

[PoloSec]

“We expect”

In the 2nd half will become...UNEXPECTEDLY!

[CodeToad]

“unexepected”, as in, no one knows anything anymore. Incompetence is everywhere.

[Bean Counter]

yah, and monkeys might fly out of my arse at high noon on the Fourth of July when the marching band is going by...

This is even more economic fantasy that will serve to fuel even more “unexpected” bad news this Fall.

[Kaslin]

Yeah right, but we shall see who is right.

[onevoter]

Maybe that “black optimism” has to do with the expansion of welfare, food stamps and free medical care that “the one” has been delivering, compliments of the “gloomy white working population.”

[M Kehoe]

I don't like this drinking game using/hearing the word, “unexpected." I seem to stay drunk all the time...

5.56mm

[Soul of the South]

“We will all be eating at the big fish fry provided by O. In the meantime, men and women will be unable to find jobs because of offshoring and who know what gasoline will cost per gallon because of O’s ridiculous energy policies?”

What Republican is going to do anything about offshoring? They depend to much on the Wall Street banks and private equity firms busy enriching themselves offshoring what little is left here and loaning our savings to other countries that will never pay us back.

Small businesses today cannot get bank loans. Yet I read this morning US banks have provided insurance to European banks for up to 46% of the debt of Greece, Portugal and Ireland. However, the capitalization of US banks is not strong enough to handle the default. When Greece defaults this year or next, the European banks will come to their insurers and Wall Street will run with its hands out to the US Treasury and the Federal Reserve.

While I believe in capitalism and free markets I’ve come to the conclusion the current situation with banks too big to fail is as great a danger to the public as terrorism by Al Queada. These banks are going to bring down the economy if something isn’t done. It is time to break them up by separating investment banking from insurance and retail banking again. Let the investment bankers make the risky loans, if they wish, and when those loans go bad let those bankers and their shareholders go down without dragging the rest of us with them.

[trebb]

Maybe that “black optimism” has to do with the expansion of welfare, food stamps and free medical care that “the one” has been delivering, compliments of the “gloomy white working population.”

My thoughts too - while there are more whites on the programs (sheer numbers vs. total population, there is a much larger percentage of non-whites that consider such programs "making a living".

[Colonel_Flagg]

Economy May Improve 2nd Half

Second half of what?

[KeyLargo]

“Maybe that “black optimism” has to do with the expansion of welfare, food stamps and free medical care that “the one” has been delivering, compliments of the “gloomy white working population.”

BINGO!

This is a WebMemo On Entitlements, Welfare and Welfare Spending

Expanding the Failed War on Poverty: Obama’s 2011 Budget Increases Welfare Spending to Historic Levels
Published on March 21, 2010 by Kiki Bradley

http://www.jbs.org/jbs-community/groups/viewbulletin/406-Welfare+and+Obama?groupid=225

[Brilliant]

The growth, if it happens, will only be in government. We will have a couple hundred more paper shuffling bureaucrats whose salaries will make it look like we are generating more value.

[GailA]

ROFLOL

Not if fuel and food prices keep climbing. And the closer we get to implementing 0’care.