And the bad news just keeps on rolling in.
“It seems that almost every bit of data about the health of the US economy has disappointed expectations recently,” said Riddell, in a note sent to CNBC on Wednesday.
“US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing.”
“And that’s just in the last week and a bit,” said Riddell.
Pointing to the dramatic turnaround in the Citigroup “Economic Surprise Index” for the United States, Riddell said the tumble in a matter of months to negative from positive is almost as bad as the situation before the collapse of Lehman Brothers in 2008.
“The correlation between the economic surprise index and Treasury yields is very close, so the lesson is that whatever your long term macro views are regarding hyper inflation vs. deflation or the risk of the US defaulting, the reality is that if you want to have a view about government bond prices, the best thing you can do is look at the economic data to see what’s actually going on,” said Riddell.
Isn’t that a pile of good news?
And in the comments to this post commenter ej provides this interesting link on the problem with the stimulus,
1. The “irrationality” is not primarily in the system’s response to the initial financial impulse but in the unsustainable expansion of the housing and other capital markets in the first place. Proposals to prop up the housing market as if its contraction is some kind of unfortunate overreaction are not credible. Too many resources went into the housing market due to the low-interest-rate policy the Fed followed for too long. While housing prices have fallen recently in many markets, they need to fall further. Markets should be allowed to equilibrate.
2. Equilibrium in the housing market would provide greater transparency to the value of mortgage-backed securities. Lack of certainty about housing prices and the ultimate extent of foreclosures only adds to the problems surrounding the illiquidity of these securities.
3. Government infusion of capital with the purpose of restoring the status quo ante ignores the facts: Fannie and Freddie were overexpanded, the domestic automobile industry is a destroyer of scarce capital, some financial firms did a poor job of allocating risk, banks extended loans under the pressure of the government to people who should not own homes, and so forth. Resources were misallocated.
In other words, what we are trying to do is go back to the way things were. But we can’t go back to the way things were because that was not sustainable and that bubble has already burst. We can’t even go back to where we would have been if there had been no bubble because nobody knows what that point is, and even if we did, what happens once we get there? Raise taxes and interest rates? Shrink the money supply? All contractionary measures so be sure and all the people who have been sustained by such policies will likely resist and those people have quite a bit more pull than the American taxpayer when it comes to determining policy.
The above linked article also makes another interesting point confidence follows from a correction. You can’t increase confidence in the economy amongst consumers and businesses by trying to return to a state that is no longer attainable. In fact, if anything you’ll likely reduce confidence and increase uncertainty. Problem is that the pressure is on politicians to do exactly that. Fix it, go back to the good times.
