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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

With the Dow Jones Industrial Average setting new records, it is important to recognize current stock prices are hardly extraordinary. Adjusted for inflation, stocks are still well below their January 2000 peak and may have a long way yet to run, but much stronger economic growth is needed to drive profits higher and sustain a bull market.

Stock prices are helped by the Federal Reserve’s bond buying and thumb on interest rates and by cash-rich companies aggressively buying back stocks and boosting dividends. Simply, U.S. CEOs are flush with cash but don’t have enough opportunities to invest in organic growth in a slow-growing U.S. economy.

To date, corporate profits have been driven higher mostly by U.S. firms thinning employee ranks to accommodate slow-growing domestic sales, and by big gains abroad–about half of the profits of S&P 500 companies are earned outside the U.S..

Boosting worker productivity in slow-growing markets has limits, and many companies may reach those in 2013. Repatriated foreign profits face stiff corporate taxes, making future stock buybacks and raising dividends more difficult.

In the end, a stronger U.S. economy is needed to sustain a bull market into 2014, and the fundamental competitiveness of the U.S. economy in global markets must be improved.

Consumer spending should strengthen with improvements in the housing market; however, reductions in federal spending and deficits and eventual Fed pull back from bond buying and higher mortgage rates policy portends only moderate growth in the combined contributions to aggregate demand from consumers, federal and state governments, and residential construction–those ultimately drive the remaining component of demand, business investments in structures, equipment, software and the like.

Too many consumer dollars go abroad for Middle East oil and Chinese goods that do not return to buy U.S. exports. Thursday, the Commerce Department is expected to report the January deficit on international trade in goods and services was $43 billion-about $500 billion annually.

Businesses, consequently, are pessimistic about future demand for U.S.-made goods and services. And bearing higher taxes, more-burdensome regulations, and increased benefits costs mandated by Obama Care, they are reluctant to undertake major new investments in the U.S. and continue investing and hiring mostly abroad.

Imported oil and subsidized imports from China account for the entire trade gap. Development of new onshore reserves in the Lower 48, despite all the hype, haven’t delivered nearly enough new oil, and a full push on U.S. potential in the Gulf, off the Atlantic and Pacific coasts and in Alaska could cut U.S. imports in half, push U.S. growth well above three% a year, and persistently push up U.S. stock prices.

The surge in natural gas production and accompanying lower prices substantially improves the international competitiveness of industries like petrochemicals, fertilizers, plastics, and primary metals–and important new investments have been announced. Investment opportunities are beginning to surface to deploy natural gas in place of oil in rail and coastal water transportation.

However, the Department of Energy is reviewing licenses to boost exports of liquefied gas that would reduce the trade deficit and boost domestic demand, economic growth and corporate profits earned in the U.S. much less, than keeping the gas at home to boost energy-intensive manufacturing and alternatives to gasoline in transportation.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan through official intervention in currency markets and actions of state-owned banks, which often evade calibration in their scope. Other Asian governments pursue similar strategies to stay competitive with the Middle Kingdom.

Economists across the ideological and political spectrum have offered strategies to offset the negative consequences of these mercantilist policies, but the Obama administration has refused to even acknowledge those options.

Cutting the trade deficit by $250 billion, through better domestic energy and trade policies, would ignite growth in the range of 5% a year–comparable to the economic recovery of the Reagan years–and fuel a bull market that would last until the end of the decade and take the Dow past 20000.

These are the personal views of Thomas Lam, group chief economist at OSK-DMG:

The U.S. data releases last week evolved somewhat unevenly through Thursday, but ended on a weak note with the August employment report on Friday.

Aside from the weaker-than-expected August headline figure on nonfarm payrolls of 96,000 and net downward revisions of 41,000 in the prior two months, the forward-looking indicators of employment also imply less upside in the coming months.

The two broad labor market gauges that seem to be holding steady for August are the one-month diffusion index for private nonmanufacturing payrolls, which is hovering at roughly 56% (according to our calculations), and the private workweek. Separately, the decline in the August unemployment rate to 8.1% was driven mainly by the slide in labor force participation to 63.5%, the lowest since 1981. Without the decline in the participation rate, all else equal, the unemployment rate would have risen slightly to 8.4% in August from 8.3% in the prior month. Continue reading…

Federal Reserve policy makers meet Wednesday to discuss ways to accelerate economic growth. Under consideration are another round of quantitative easing and better communications strategy. However, as discussed below, interest rates would have to be pushed to negative levels–something that is simply not possible–to jump-start the housing market. And the Fed has made clear it intends to keep the federal-funds rate near zero through mid 2013. Likely nothing it says could spur more borrowing for investment or consumer durable purchases now.

Federal Reserve officials are flailing about for new tools to jump-start the economy. Sadly, the Fed has few arrows left in its quill, most are crooked, and Fed Chairman Ben Bernanke appears to not know where the target is.

The legend on Wall Street is the economy remains dormant because depressed housing values prevent homeowners from refinancing their mortgages to free up disposable income and boost consumer spending. Continue reading…

This is a column by James Moore and Scott Mather of PIMCO.

In the Fed’s zeal to try to stimulate the market through a retread of the so-called Operation Twist, this nation’s central bankers seem to have stepped into a realm where No Good Deed Goes Unpunished. In addition to the long bond dropping in yield 40 basis points in the wake of the announcement that the central bank will buy long-term Treasurys, broad equity markets have dropped some 6%. Some sectors, notably financials, have fallen even further.

That the patient has responded violently to the medicine of Dr. Bernanke and team reflects the realization that the cure may be worse than the disease. As we near the zero bound for interest rates, the usual rules do not apply–the second order side effects now dominate and cause more harm to the patient than good.

In its attempt to stimulate borrowing by making long-term money cheap, the Fed has harmed large swaths of savers. A look at three groups in particular proves instructive: pension plans, life insurance companies, and households saving both inside and out of 401(k)s. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Seeking to boost housing and jumpstart the flagging economy, the Federal Reserve will push down mortgage rates a bit by purchasing $400 billion in long term Treasury securities.

Operation Twist will likely raise short rates even as it lowers long rates, because the Fed will sell Treasurys with maturities of less than three years to purchase an equal amount of Treasurys with maturities from six to 30 years. Those purchases will be undertaken gradually and completed by the end June 2012

Lowering mortgage rates a bit may help, but it won’t have the salutary effect on home purchases needed to raise real-estate prices and get consumers, whose balance sheets remain weak and have lost confidence in President Obama and Congress, to start spending again. Continue reading…

These are the views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

With the policy decision on interest rates universally expected to have remained unchanged at the April 26-27 meeting, the focus, as always, was on the accompanying Federal Open Market Committee (FOMC) statement. The evolution of the statement, however, contains minimal surprises. Instead, the key highlight was Chairman Ben Bernanke’s post-meeting press briefing debut (going forward, the briefings will be held four times a year, coinciding with the release of the economic projections from participants–FOMC members and other FRB Presidents–normally in January, April, June and November).

In the April statement, the FOMC toned down their description of the ongoing economic recovery to “proceeding at a moderate pace” from “firmer footing” in March, but gained more conviction in the “gradually improving” labor market conditions. This implies that the Committee does not view the 1Q 2011 soft patch in the economy as a likely turning point.

In addition, while the FOMC further acknowledges the pass-through from higher commodity prices to inflation, the Committee maintains that the spillover is likely to be “transitory” and that it is crucial to be vigilant of the changing dynamics of longer-term inflation expectations and underlying inflation.

Finally, the FOMC also confirmed, as we expected, its intention to “complete” the $600 billion Treasury purchase program by June and maintain the existing reinvestment policy for now.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Wednesday, Federal Reserve Chairman Ben Bernanke will discuss with reporters decisions taken by the Federal Open Market Committee. For this unprecedented press conference to be successful, Bernanke must venture where Fed chairmen are most reluctant to go–into politics.

Economists have long held that transparency about goals and means makes monetary policy more effective. However, genuine transparency requires that Bernanke acknowledge the limits imposed on the Fed policy by the actions of Congress, the administration and foreign governments.

Inflation is heating up, thanks to rising oil, food and other commodity prices. Many in Congress and financial markets blame QE2–the Fed’s policy of purchasing Treasury securities to moderate interest rates on mortgages, corporate bonds and the like–but easy money is not causing inflation.

China and several other Asian governments choose to keep their currencies substantially undervalued against the dollar and regulate domestic gasoline and other commodity prices. Those policies boost Asian exports and growth, slow U.S. and European growth, and push up global prices for oil and other commodities.

Continue reading…

(These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission.)

Federal finances are in shambles, and Americans should be amused if not disgusted by the explanations and solutions both political parties offer.

President Obama’s budget plan issued in February projects a $1.6 trillion deficit for 2011 and a cumulative shortfall of $11 trillion through 2021.

Things may get worse, as additional revenue and cost savings from health care reforms don’t materialize and the 4% growth assumed by the president’s budget for the next four years proves Pollyanna.

Time and again, Obama and House Democratic leader Nancy Pelosi have demagogued the problem, blaming two wars and tax cuts instigated by President Bush and the Great Recession.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

S&P has downgraded Japan’s long-term debt from AA to AA-, indicating the U.S.’s AAA rating should be taken down several notches to less than AA-.

National economies must generate foreign currency for their governments to pay foreign creditors, and national governments must be able to tax, sell bonds or print money, without causing inflation, to cover operating expenses and pay interest.

Japan’s ability to pay is simply much stronger than the U.S.

Japan has a strong current account surplus, thanks to a powerful manufacturing export machine, and the Bank of Japan sits on $1 trillion in foreign-currency reserves. It has more than enough cash flow and adequate reserves to service the claims of foreign creditors. The U.S. can hardly make such a claim.

Domestically, Japan suffers from deflation, slow growth and maintains a large budget deficit to prop up domestic demand because Japanese citizens save so much. With prices falling, even in the face of global commodity inflation, the Japanese government has adequate latitude to sell bonds to its savers, and the Bank of Japan has more than enough flexibility to purchase those bonds as needed without instigating domestic inflation or creating other adverse macroeconomic consequences.

The U.S. is a different situation. The U.S. has a gaping current account deficit–on oil and with China–and policies pursued by the Bush and Obama administrations are worsening those conditions. Owing to the large current account deficit, the U.S. must run a huge budget deficit, close to 10% of gross domestic product, just to sustain growth at 3.5% and keep unemployment from flying out of control.

The large U.S. current account deficit indicates the U.S. economy as a whole isn’t generating adequate revenue to pay foreign creditors interest due on U.S. debt, and Washington must service the interest on externally held debt by printing more bonds and selling those abroad, but foreign private demand for those bonds is satiated. Consequently, the U.S. is much too dependent on the government of China to print yuan to buy dollars and, in turn, to use those dollars to buy Treasurys to finance the U.S. private economy’s current account deficit and the federal budget deficit.

Beijing plays along because the resulting weak yuan and trade surplus with the U.S. helps deal with Chinese unemployment, but printing so many yuan requires Beijing to sterilize those extra yuan by persuading Chinese investors to purchase too many yuan-denominated government bonds, bonds the private sector doesn’t want. Continue reading…

These are the views of Thomas Lam, group chief economist at OSK Group/DMG & Partners

The Jan. 25-26 Federal Open Market Committee meeting ended without any drama, though the tone of the accompanying statement might be somewhat dovish.

The upgrade to the growth description, while in line with expectations, was more modest. Moreover, the ongoing progress of the recovery was still deemed “disappointingly slow”. And the four new rotating members of the FOMC coalesced with the other seven permanent members on the January vote.

The key message of the post-meeting statement is that with a timid recovery in broad labor market conditions and underlying inflation trending lower, the FOMC has no immediate plans to deviate from the current policy stance of purchasing longer-term Treasury securities and maintaining the policy rate at current levels. This is consistent with our prevailing view that the $600 billion Treasury purchase program would be fully absorbed. Continue reading…