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Crazy aunt out of the closet
In a presentation to this year’s annual meeting of the American Economic Association, Alan Blinder argues that the circumstances—low inflation and low nominal interest rates, persistent excess capacity, and fiscal policy paralyzed by large debts—that have forced central banks to operate through unconventional policy will be a recurring feature of the economic landscape. “We can’t stuff the crazy aunt back in the closet”.
According to Economist Magazine, of the rich world’s four major central banks, Britain’s and Japan’s already have their policy rates stuck near zero and the fourth, the European Central Bank (ECB), is likely to get there this year. Meanwhile, the balance-sheets of all four institutions have ballooned as they expand the volume and range of assets and loans they hold (see charts below).
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Whatever central bankers do, they cannot repair problems best fixed by politicians, such as America’s incoherent fiscal policy or Europe’s fractured institutions. Asked about the ECB’s aggressive new lending to banks, Masaaki Shirakawa, the governor of the Bank of Japan, said it could “buy time”. But he warned it could backfire if politicians fritter away whatever time the central bank has bought. Unfortunately, that risk is never low.
Bob Doll’s Ten Predictions in 2012
Bob Doll at Blackrock offers his market predictions in 2012-
10 Predictions for 2012
Making predictions for a new year is always a difficult task, but this year the uncertainty associated with emerging markets growth, upcoming elections, and the European debt situation in particular, make the forecasting exercise especially precarious. Nevertheless, it is with this backdrop that we move forward with our predictions for 2012:
- The European debt crisis begins to ease, even as Europe experiences a recession
- The US economy continues to muddle through yet again
- Despite slowing growth, China and India contribute more than half of the world’s economic growth
- US earnings grow modestly, but fail to exceed estimates for the first time since the Great Recession
- Treasury rates rise and quality spreads fall
- US equities experience a double-digit percentage return as multiples rise modestly for the first time since the Great Recession
- US stocks outperform non-US stocks for the third year in a row
- Dividends and buybacks hit a record high
- Healthcare and energy outperform utilities and financials
- Republicans capture the Senate, retain the House, and defeat President Obama
The US is still under recession watch
In the last summer, David Rosenberg made the recession call – he’s 99% sure the US will slip into recession. Despite a very volatile second half of 2011, the recent data on unemployment, consumer confidence and housing sales all seemed to indicate the US economy is getting better.
But according to the leading economic indicator, shown below, the US economy is still pretty much under recession-watch territory. Since late 1960s, the indicator only missed once in predicting the onset of recession — the second half of 2010. In other words, at the current level of the index, there is a very high risk that the economy is likely to head down, not up. So will the indicator miss the target again, or we are indeed heading into another recession in 2012?
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In the following video interview, the author of ECRI leading indicator explains to Bloomberg’s Tom Keen why he thinks the US is still not out of woods yet.
US housing market update
The latest housing price, as captured by the Case-Shiller Index, continued to fall in October. Here are two sharp charts from Calculated Risk.
Time trend:
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Accumulated price fall by major US cities:
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Combined with latest sales figure, the inventory of existing home sale, after a faked jump due to government’s incentive program, seemed starting to move again. However, the new home sale is still very much depressed.
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According to PNC’s Stuart Hoffman, 2012 will be a transition year for the housing market. The hope is that the gradual fall of the housing price may eventually clear the inventory, six years after the last housing peak.
If the economy turns weaker in 2012, the Fed may eventually be forced to buy more mortgage-backed securities. However, the likelihood of any household debt relief program is dim, considering the current fiscal situation. In 2012, we are likely to see a continued muted growth in the US. Now people began to appreciate the importance of housing in driving business cycles. Without robust recovery in US housing market, any talk of V-shaped recovery only sounds foolish.
A recent coversation with Jim Rogers
Part 1:
Part 2:
Part 3:
US labor market shows major improvement
The recent initial claims on unemployment benefits shows a major improvement in the US labor market:
“Soft” Budget Rules
Similar to the soft budget constraints (or SBC) under former socialist countries, the budget rule under EU treaty is also “soft” in a sense that violating the rule won’t be really punished. Punishments, such as kicking the “rogue” member country out of the union, run contradictory to the political ambition of the European Union and would risk breaking the union altogether.
The other option is to rein in the government spending of the member countries. But that would require a centralized authority with direct control of the member countries, especially on their fiscal policies, i.e., how governments spend their money. At current stage, Europe is not ready for such radical change, which requires a big surrender of their own sovereignty. So what Europe will likely end up is a fake fiscal union with soft budget rules. The moral hazard problem is unsolved. Rest assured to see more budget rule violations in the future.
The following map from WSJ gives a very nice summary of how the union’s budget rule had been violated in the past.
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