Market Talk

I read another comment from a Wall Street type this morning crowing about the “sustainable” recovery in the U.S. The strategist is quite pleased with earnings, noting they’re exceeding “expectations,” but also pleased that sales are likewise exceeding “expectations.” This is a sign that the recovery is building some kind of momentum.

You don’t say?

Let’s see President Obama tell the nation tomorrow night that it can’t afford the tax giveaways the government, in fact, just gave away, and that he’s going to reverse them. Let’s see the FOMC on Wednesday come out and say it’s going to raise rates and scuttle QE2. Then we’ll see how “sustainable” the “recovery” is.

Any talk of the economy’s fundamental strength is useless when the federal government not only leaves the Bush tax cuts in place, afraid to upset the fragile state of the consumer, but also goes ahead and cuts payroll taxes. When the Federal Reserve has short-term interest rates pinned to the floor with the spilled beer and peanut shells, and is out there pumping $80 billion a month into the marketplace, which acts both as a continuing back-door bailout for the banks and a ready stream of liquidity to feed speculators with easy money.

Ask any state treasurer how sustainable the recovery is.

Ask anybody who saw their wages slashed if the “recovery” is “sustainable.” Ask anybody who’s lost their job if the recovery is sustainable. Ask any of the more than, well more than, one million people who have been out of work for more than two years if the “recovery” is “sustainable.”

Hell, ask them if there’s even been a recovery.

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Now that the recession’s “officially” over, what changes if any can we expect to see?

- I expect that tomorrow the FOMC, the rate-setting committee of the Federal Reserve, will announce that it’s going to start raising interest rates, now that the recession’s over. After all, the Fed cut its overnight fed funds rate to zero in response to the recession. If the recession’s over, it should be self-evident that a zero percent interest rate is manifestly irresponsible. So forget all this talk about QE II, about another bond-buying scheme from the Fed. It’s time to start the exit strategies and rate tightening.

- I expect the Obama administration to phase out all stimulus programs, and to scuttle the programs it proposed just a few weeks ago, now that the recession’s over. Forget about extending the Bush tax cuts. They are not needed. The economy’s expanding.

- The debate over whether or not to extend unemployment benefits will disappear on its own now that the recession’s over, as companies start hiring again and that army of the unemployed dwindles down to nothing.

- The FASB, the Financial Accounting Standards Board, reinstates the rules for mark-to-market accounting that existed before the recession started, now that the recession’s over. After all, the rules were suspended because of the emergency created by the credit crisis. If the crisis is over, it’s time to reinstate the old rules.

- States and local governments will balance their budgets again, as their revenue rises, since now that the recession’s over and the economy’s expanding citizens will see their incomes recover, which will boost the tax rolls.

How many of those things do you expect to happen? I’d put the odds on them, in order, at zero, zero, zero, zero and zero. So long as the Fed is keeping interest rates at zero, a number that in any other context would be considered dangerously irresponsible, so long as hiring remains stagnant, so long as the government is more concerned about stimulus than austerity, so long as state and local governments remain on the edge of the budgetary abyss, whatever tag we give the economy won’t matter. It’s a point John’s made a few times, and it’s worth bearing in mind as you hear people trying to talk up the recovery.

It’s going to a long, protracted, painful phase we’re going through here.

- “We have the specter of Greece’s finance minister insisting really, no really, it will never ever default, or default via restructuring,” Yves Smith quips at naked capitalism. “Now given the unfortunate accident of timing, these protests sound awfully Dick Fuld like, although the better parallel is probably Mexico, which kept insisting in 1994, no way, no how would it need to restructure, despite having a lot of dollar denominated obligations and an untenable currency peg,” she adds. “And it was OK, until it wasn’t.”

- As chatter ramps up about new stimulus plans, FusionIQ CEO Barry Ritholtz has his own ideas for what he would do if given $1T to stimulate the economy. “Some folks believe the government should do nothing, spend no money, focus on balancing the budget,” Ritholtz says. “But is the ideal time to begin a new diet and exercise regime when you have pneumonia? The time to reduce the government’s economic deficit and footprint is during a robust expansion, not during (or just after) a contraction.”

- S&P 500 still hasn’t eclipsed its August highs, but market breadth has indicated underlying strength in the September rally, Bespoke Investment Group says. About 80% of S&P 500 stocks are trading above their 50-day moving averages, which is higher than last month. “This isn’t quite to the highest levels seen over the last year, but it’s getting close.”

- “It takes jobs to create households, and usually housing is the key driver for employment growth in the early stages of a recovery,” Calculated Risk says. “So this is a trap: the excess supply means weak employment growth, leading to few new households, so the excess supply is absorbed slowly — putting off more robust employment growth.”

- JPMorgan Chase (JPM) finally issues a formal apology for the web problems that plagued its online banking service earlier this week. “We are sorry for the difficulties that recently affected Chase.com, and we apologize for not communicating better with you during this issue,” JPM says on its website. The apology is notable as many bloggers and folks on Twitter had criticized JPM for its failure to properly communicate this issue with its customers.

- Google Voice cofounder Craig Walker is leaving his role as a manager of real-time communications at Google (GOOG) and returning to his entrepreneurial roots. Walker, who was previously chief executive of Grand Central and renamed Google Voice after its acquisition by GOOG in 2007, will become Google Venture’s first resident entrepreneur, TechCrunch reports.

- “With two strong divergent opinions on gold and low implied volatility levels, this could be an excellent time to buy options in order to establish speculative long or short positions in the metal,” Bill Luby writes.

- All Things D blogger Kara Swisher doesn’t sugarcoat her thoughts on Yahoo (YHOO) CEO Carol Bartz. “Her actions in regards to the Internet giant’s Asian relationships are about as bad as it gets these days.”

- Poverty rate climbed to 14.3% last year, while those lacking health insurance rose to 50.7 million from 46.3 million. Incomes fell slightly as households relied on government and family aid to weather the recession.

- For the city that never sleeps, take a look at some of Central Park’s midnight runners.

Gluskin Sheff’s David Rosenberg rips apart the Obama administration’s latest “emerging program to jolt the economic recovery from its stall,” as the NY Times characterizes it (don’t you dare call it stimulus.) I can’t recall seeing Rosenberg this overly political before; usually he keeps to purely economic themes. It’s safe to say he isn’t a fan of the latest ideas.

I’d argue that the Bush tax cuts didn’t have nearly as much to do with the Aughts rally as the Fed’s low interest rates did, and the booming business in unregulated derivatives, but that’s a quibble.

My great problem with the Obama administration is that the President didn’t go full-bore at the economy the day he got into office. Sure, he pushed the $800 billion stimulus program. But while the price tag was massive, the effort itself was lazy. About the easiest thing in the world for a government to do is to throw money at a problem. I’d rather have seen some creative solutions. Something, anything. Instead, we got a rush job with the stimulus program, and then the White House moved on to more “important” matters, like healthcare.

Anyhow, the latest raft of proposals, which add up to a second stimulus program no matter how they are characterized, are likely to have the same temporary, sugar-rush effect of the first program, if they have any effect at all. As Rosenberg points out, the biggest problem for corporations isn’t exactly a lack of cash.

Aren’t businesses sitting on a record cash hoard right now? In other words, “money” is not an impediment towards business investment growth, say, as much as the regulatory policy backdrop.

This is again one in a long list of quick fixes aimed at boosting domestic spending and is likely to have muted impact, in our view. Even if it does have an impact, it will merely bring forward spending that would have occurred in any event and merely distort the quarterly flow of GDP data much like ‘cash for clunkers’ and the housing tax credits did for the household sector.

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If we only had some customers.

Edmund Phelps makes the argument in a NY Times op-ed over the weekend that the economy is faltering in many aspects, but a lack of demand isn’t an issue to worry about.

The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand, the total demand for American goods and services. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall.

The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention.

Phelps argues that structural deficiencies are plaguing the economy. Short-term pessimism is running rampant, which is hindering companies from increasing capex spending. He also notes business investment relies on innovation, which isn’t happening right now, especially with unemployment remaining at a stubbornly high rate. From Phelps:

Sustained business investment, in turn, rests on innovation. Business cannot wait for discoveries in science or the rare successes in state-run labs. Without cutting-edge products and business methods, rates of return on a great many investments will sag. Furthermore, innovation creates jobs across the economy, for entrepreneurs, marketers and buyers. State-led technology projects do not.

All are decent points. But Phelps’ final line reads like a dagger that ruins his entire argument. “Rather than continuing to argue over solutions to a problem we do not have — low demand — the country needs to focus on fixing the structural problems that, unresolved, will stymie the economy over the long haul.”

It seems like wondering which is the true culprit of the economy’s problems — sustained business investment or low demand — is like arguing which came first, the chicken or the egg? Completely disregarding low demand as one of the key issues plaguing the economy is short-sighted, at best.

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Good thing the Miracle Mart stays open late.

The administration had to come right out the other day and squelch a rumor making the rounds, a real wild fire, that Fannie and Freddie were going to offer some loopy mortgage-forgiveness program, which would have the effect of a stealth sort of stimulus program, because all those grateful home owners would suddenly have, via a smaller mortgage nut, more discretionary money to spend.

“People make jokes about the U.S. turning into Argentinaville, and a gambit like this would push us close,” the Journal’s editorial page said (although they still managed to blame to administration for more or less fostering the rumors, never mind the fact that Wall Street never met a government handout it didn’t like, so long as it was attached to the hand taking the out.)

There is definitely a yearning out there for something new from the government, and it’s not necessarily being spread by the administration. It’s palpable. This is it. We’ve come to the end of our stimulatory rope, and we’ve found that indeed we were pushing on a string all along. If people want to say the stimulus saved 8.5 million jobs, well, fine; there’s no way to definitively prove that, but have at it. The stimulus was supposed to spark up and restart the business cycle, get companies hiring, people spending, everything humming again.

It hasn’t worked. The government — through two administrations of differing political parties and a purportedly independent central bank — has almost literally moved heaven and earth to try and get this economy firing again, and it’s gone just about nowhere.

Not totally nowhere, mind you. Wall Street was saved. Corporate America’s doing pretty good, judging by second-quarter profits. But the small-business is still struggling, and the average consumer is just out in nowheresville.

This morning’s lousy jobs report is just reinforcing the cry for somebody, somewhere to do something. Somebody, somewhere, may in fact try. But what makes you think anything, a stealth stimulus, or another round of quantitative easing, will be any more effective that the first rounds? Especially as these next efforts are almost certain to smaller in scope.

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US stocks finish mixed, with blue chips extending their winning streak, as the Fed downgrading its economic growth outlook weighs on Intel’s blowout earnings.

Dow rises for a seventh-straight day, narrowly edging up 4 to 10367, its longest wining streak since March. Nasdaq Comp gains 8 to 2250, but S&P 500 drops 0.2 to 1095.

Fed, which trims its forecast for first time in more than a year, now expects GDP growth of 3% to 3.5% and sees prospect of more monetary stimulus. Economic data also disappoint amid a bigger-than-expected decline in retail sales and smaller-than-predicted gain in business inventories.

But weak economic data have largely been overshadowed this week as earnings season has gotten off to a commanding kickoff.

Lots on deck for tomorrow. JPMorgan reports in the AM and Google’s posting earnings after the bell. PPI, industrial production as well as weekly jobless claims on the economic calendar. And China’s expected to report 2Q GDP.

- “The arguments for a slowdown and double-dip recession are basically the same: less stimulus spending, state and local government cutbacks, more household saving impacting consumption, another downturn in housing, and a slowdown in Europe and in China,” Calculated Risk blogger Bill McBride notes. “It is only a question of magnitude of the impact.”

- “Of course, you never know until after the fact whether a correction is just the first leg down in a new bear market,” Tom Petruno says. “That, once again, is the agonizing question for investors.”

- Financial regulatory reform legislation, in its present form, has several positive aspects, writes Mark Thoma. Still, it fails to eliminate the too-big-to-fail problem and, as a whole, leaves him wanting more. “As with health care reform, the legislation is unsatisfactory in many ways — it leaves much of the job yet to be done — and it’s not clear that Congress will have the will to follow through,” Thoma says.

- YouTube is the latest to weigh in on the Great Flash War of 2010, siding with Adobe (ADBE), which makes Flash video technology that Apple (AAPL) has banned from its devices. “Today, Adobe Flash provides the best platform for YouTube’s video distribution requirements,” writes John Harding, a YouTube software engineer. That’s why “our primary video player is built with it,” he adds.

- “Restaurants are a discretionary expense, and they tend to be ‘first in, last out’ of a recession for consumer spending,” Calculated Risk says, as opposed to the housing market, which is considered a first in and first out sector in the recession-dating cycle. “Since restaurants both lead and lag recessions, this contraction could be because of the sluggish recovery or might suggest further weakness in consumer spending in the months ahead.”

- Verizon (VZ) will reportedly begin launching its LTE network in 25 markets starting November 15, according to gadget blog Boy Genius Report.

- “The inventory boost has accounted for over 50% of GDP growth so far during the recovery, so a substantial pickup in final demand growth will be necessary to keep gains in employment and output from slowing  economists from the Dallas Fed write. “That the required pickup will occur is far from obvious.”

- There’s increasing evidence the economy’s poised for another rough patch in 2H and beyond,” Pete Davis writes. “What more can Washington do? We’ve already done about everything anyone can think of to stimulate the economy. It’s had some beneficial effect, but it may not be enough.”

- Just as the S&P 500 keeps making lower lows, the VIX run-ups can’t quite reach their previous highs. “The increasing sluggishness in the VIX reflects what I call a progressive desensitization to fundamental factors…and technical factors that investors experience after the novelty of various threats — including very serious ones — begins to wear off,” VIX and More blogger Bill Luby says.

- He’s human? Six-time Wimbledon champ Roger Federer ousted in quarterfinals.

The G20 has one word for you: austerity.

Good conversation between myself, Simon Constable and Bob O’Brien on today’s News Hub about what if anything the government could do should the economy actually start rolling over. While I didn’t mention in this conversation, it’s worth asking if the federales should do anything. The positive effects of the stimulus are debatable, the negative effects we still don’t know about, and it’s quite possible that everything they’ve done has just delayed the inevitable