Monday june 28th 2010, a very funny start to the markets. FRB Richmond researcher has published an article stating macro economics is too arcane for people without any formal training. He went on to say people with Phd’s are best suited to render their expertise on the formidable area of macroeconomics. His main intention looks like bashing at blogging world that is bringing transparency to the incomprehensible activities of various stake holders ( fed, politicians and market leaders). Bloggers came back with their rebuttals. All these rebuttals are very much fun to read.
Search for fed economist calling stupid bloggers.
Okay now let us talk some money matters. What happened today in the markets? Bonds staged another rally on the concerns of deflation and stringent measures of austerity talk from G20, Euro came down because of concerns related to Spanish banks, equities staged selloff at the behest of depression kind of feeling in the market.
Bonds: 10 year treasuries have closed at 3.02 %. Rates are in the mode of rally for a while. Entire may rates went down due to the concerns related to sovereign contagion. In june this rally got reversed initially but talk of weaker economic reports is pushing the yields lower and lower. There is a possibility of rates going lower further. Right now market sentiment is very very bullish on rates. Last week we have seen very weak housing report. One thing can put a damper into this rally is change in sentiment, this can be in the form of strong economic reports, ISM and unemployment report. Chances are less likely that a stronger report will emerge.
Now, GDP is driven by consumption and there are no signs of improvement in this factor. Financial crisis of 2008 has altered people’s mind sets from borrow and spend to save and save. Economists say this is not good for the economy. This will lead to deflation. Unofficial Unemployment rate is hovering in double digits. In such a scenario, no one wants to spend the money. Housing is ready to fall to the ground once the crutches of tax credit are expired. Market fundamentals are not at all strong. Every indicator is showing signs of weakness. In this scenario, trade of the day would be bearish trade on equities, bullish trade on bonds and a range bound to down ward bias trade in commodities. In this kind of scenario, European economies suffering from the contagion risk of peripheral countries debt problems are posing another first order risk to growth.
Emerging economies are struggling to break the ugly inflation. I think world is getting into more interesting situations.
US cannot improve its consumption by giving money to consumers. It can improve this by few ways
1) Reducing taxes
2) Building a stronger manufacturing economy
3) Reducing the cost of entitlements.
Reduction of taxes has an amplifying effect on the GDP. I think researchers like Christina romer have contributed their fine minds and effort in analyzing this fact. I don’t want to muddle their well received thoughts with my interpretations. On second and third point I would like to offer my thinking. US has started loosing its grip on manufacturing economy due to increased cost pressures. It takes more dollars to build a car in US than in a developing country. So capital went to these low cost areas and hence US became an economy more dependent on services. Demographics are changing every day. Not every human being wants to become a Harvard law graduate. Some like to live a life of mechanic and some want to become a ice cream maker. These kind of people find jobs with small business owners. Main concern for these small business owners is health care costs. If governments tackle this issue deftly (not sure if Obama care can do this) then people in this sector will get to keep their jobs and they will become bearers of consumption and economy will get kick started. I would implore every leader to work towards an amicable solution to entitlement costs to bring the lower end of society to survive and live life. In the post 2008 crisis recovery, people with good education have gotten improvements faster than the low income groups.
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