BI-POLAR ECONOMISTS…

It seems that just last week the economic recovery was “self sustaining”.  It was difficult to find many economists or pundits who didn’t like the data or the general improvement in economic trends.  But one average payrolls report later and suddenly it seems like everyone thinks the recovery is on thin ice and likely requiring more government aid (as if QE helps in the first place).  Here’s a sampling of responses from this morning’s research reports (mostly via the WSJ):

Paul Krugman:

“Meanwhile, just a quick note on the jobs report; not good, of course. You don’t want to overreact to one month — but this shows the utter folly of all the talk about how it’s time to move from stimulus to tightening, time for the Fed to worry about inflation instead of jobs, and all that. We’re still very much in the Lesser Depression, and all our focus should be on getting out.”

Mark Thoma:

“This is just one month’s worth of data, and monthly data can be noisy so it’s not time to panic yet. The recovery could pick up steam again next month. But the possibility that it won’t pick up, e.g. because unseasonably good weather distorted the numbers for the last few months, has to be taken seriously by policymakers. Those in charge of monetary and fiscal policy must realize that forecasts have both upside and downside risks, and that doing too little if economic growth turns out to be slower than expected is far more costly than doing too much because economic growth exceeds projections.”

Brad Delong:

“Unemployment rate declines that spring from falls in the employment to population ratio are really unwelcome…”

Neil Dutta, Bank of America Merrill Lynch:

“The March employment report was decidedly downbeat and offsets some but not all of the positive tone we’ve seen in recent labor market indicators. All you have to do is check off the boxes. Softer payroll growth? Check. Shorter work week? Check. Soft earnings? Check. ”

Dan Greenhaus, BTIG LLC:

“The decline in [the employment to population ratio] has been instrumental in keeping the unemployment rate lower than it might otherwise be, something that Ben Bernanke is keenly aware of. While the labor force has surged of late, taking it back to, roughly speaking, peak levels, it remains below the level at which it would have been had previous growth rates been realized. Again, Ben Bernanke knows this and when discussing the role of monetary policy, QE3, in the current environment, the discussion is not only about asset prices or inflation. The debate about whether monetary policy can help fix what some believe is wrong with the labor market and right now, despite what some are saying, Ben Bernanke believes the answer is “yes.”’

Goodness gracious.  How quickly the negativity comes back to bi-polar pundits, huh?  Even more surprising is the short memories regarding QE2.  Did we all forget that QE2 did approximately nothing for the US economy?  Now, QE in Europe has worked, but only because it’s essentially helped fund member states.  That’s entirely different from the way QE works in the USA where it simply swaps assets.  What we’ve seen in Europe in recent months is totally different and has been supportive.  But QE3 if implemented in the same manner as QE2 is unlikely to do much aside from cause asset prices to once again deviate from fundamentals.  Then again, maybe that’s all anyone cares about anymore….If we can keep asset prices up then everyone wins, right?  Never mind that the underlying fundamentals might be deteriorating….Hopefully that’s not the mentality that most investors are taking now, but given two decades of the Greenspan and Bernanke Puts I guess we shouldn’t be surprised that that mentality is increasingly popular.

Me personally?  I don’t think this changes the outlook for QE.  The Fed has now been crystal clear.  They’re not implementing further QE with the core inflation rate over 2%.  Today’s report doesn’t change anything.  Now, if this weakness becomes a trend then maybe the QE argument begins to pick up steam.  But I’m still in the “no 2012 recession” camp.

 

 

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:
TwitterLinkedIn

  • VII

    Nice observation CR. I noticed that also..funny I saw Pimco making there plee for QE also.
    Couldn’t agree more with your post…
    Happy Easter Cullen!

  • whatisgoingon

    Cullen I’m not sure if you are saying if
    - a few of these economists are now changing their positions regarding the economy after digesting this newly released information or
    - some of these economists have now gone short the market and are perhaps talking the other side of the economic recovery
    - or perhaps neither

  • Octavio Richetta

    These are crazy times. There is no script for what is going on… CR, your words are clever. When you say you still are in the no 2012 recession camp, Do you mean you are leaving the door open to change your mind?

    I say that when you combine all the worldwide data points in the last six months, and the little maneuvering left for CBs; the odds of a US recession in 2012 are better than 50% as of now. In other words, to make it interesting, I assume the “wait and see” deadline is today, and take the other side of the bet with eight months left in the year. i.e., no Bayesian wiggle room for me even though I don’t see the probability of recession at 100%.

  • Octavio Richetta

    Most interesting view on gold I have read recently, and it is not from a gold bug:

    http://alephblog.com/2012/04/06/gold-does-nothing/

  • Andrew P

    PIMCO is just talking their book. Didn’t they tell us that they were long and strong on UST’s?

  • Andrew P

    Something to keep in mind. If there is a QE4, the Fed will have to buy something other than UST’s. The Fed, through QE2 and Operation Twist (QE3), already owns 91% of the issuance of long term Treasury bonds. The Treasury doesn’t sell all that much long term stuff either, because why should they? I suppose the Fed could just set the long term interest rate at zero just like they do on the short term rates, but this will not pump any new money into the economy. In fact it will subtract money from the economy. It will just give a temporary boost to stocks, until it doesn’t. If there is a QE4, my bet is that the Fed will buy mortgages like they did with QE1. They could buy stocks, corporates, or munis directly, but that would be too inflammatory in a political sense.

  • Ted

    To be fair, at least some of these economists (Krugman, Delong) have been underwhelmed by the recovery and pretty consistent in their criticism of the rush to austerity and the concerns about inflation. Bernanke also deserves credit for his “not so fast” view of the recovery. I guess we’ll see how much of the good news was due to the unusually warm winter.

  • Mercator

    Gee, I wonder if ECRI’s “party popper”, L.A. will be sought after for interviews soon! Maybe “the numbers” do matter.

  • Octavio Richetta

    Well, remember even LA reminds us that employment numbers are a lagging indicator….

  • Doug Terpstra

    “Now, QE in Europe has [papered over the problem temporarily], but only because it’s essentially helped fund member states’ [elites, who have agreed to inflict ruinous austerity on the 99].” There, just had to fix that.

    All of these ivory tower academy _conomists, thoroughly discredited since before 2007, are merely trying to jump clear of an impending disaster destined to be much worse than 2008 because of never-regulated, ballooning swaps and derivatives. These status-quo mouthpieces are only hoping to retain their veal-pen perks and privileges a while longer while the next catastrophe brings austeria to the hallowed Homeland — especially one igNobel prize-winner pushing his Criminal Reserve reserve-multipier BS from his cushy sinecure at the NeoCon Times.

  • http://wellsfargomustdie.blogspot.com Wells Fargo Must Die

    QE will come with a 10% decline in the market. The Fed is simply very confident that it has floated the market sufficiently to avoid a decline this year. Watch for QE at S&P 1250. The Fed needs to defend its gains and will protect 1250 versus 1150 in the past as it cannot afford a 20% downturn in the market.

  • whatisgoingon

    Why does the Fed need to defend S&P gains and what benefit is a higher market to them? Maybe there is some sort of wealth effect where average people feel richer and will spend more instead of saving because their 401k are now “re-inflated”. And perhaps they think this has some sort of spill over effect of creating jobs in the real economy. But….

    I think the Fed wants to reign in oil’s price even at the expense of stock gains, because high oil prices can have a negative impact on corporate profits (and hiring plans) and potentially slowing down the economy by further impairing consumer discretionary spending. When oils price drops sufficiently then some interest rate suppression measure can be redeployed to try to spur on the “real economy” to support housing (and these low rates will lead to further speculation in stock and commodities). If oil doesn’t drop in price then the Fed’s hands are tied with further monetary easing because of the risk this easing can have on oil prices and the economy.

    I think the Fed wants to reign in oil’s price even at the expense of stock gains, because high oil prices can have a negative impact on corporate profits (and hiring plans) and potentially slowing down the economy by further impairing consumer discretionary spending. When oils price drops sufficiently then some interest rate suppression measure can be redeployed to try to spur on the “real economy” to support housing (and these low rates will lead to further speculation in stock and commodities). If oil doesn’t drop in price then the Fed’s hands are tied with further monetary easing because of the risk this easing can have on oil prices and thereby the economy.

  • bahar

    Isn’t it more like Fed wants to devalue dollar so that we can pay back less and also boost our economy by boosting exports?

  • Obsvr-1

    A decent article at Zero Hedge (not a common occurrence) to check out:

    Guest Post: There Will Never Be A Failed US Treasury Auction… Until There Is

    http://www.zerohedge.com/news/guest-post-there-will-never-be-failed-us-treasury-auction-until-there

  • Octavio Richetta

    Definitely a contrarian point of view. But is it contrarian smart? The writer does not provide any compelling fundamental view/catalyst supporting his view of higher us rates. I think it is a good idea to keep an eye on signs of higher us rates but making too serious a bet/hedge about this at this point is, IMO, not very smart.

  • ES71

    > Then again, maybe that’s all anyone cares about anymore….If we can keep asset prices up then everyone wins, right? Never mind that the underlying fundamentals might be deteriorating…
    ——————————-

    Yes it is, just accept it )). I had the same thoughts in summer of 2008 when everything was getting worse and quickly but all you would here on CNBC was the likes of Larry Kudlow and a bunch of “experts” saying that there isn’t going to be a recession. They were trying to hold up the stock market anyway they could. Like it or not, CNBC is considered to be the expert on the markets in the media and then the same junk gets repeated by CNN and such. So, public starts thinking that stock market is really all that matters to policy makers. It makes public very angry.
    I wonder what FED and Treasury really think. I would think preserving 401Ks and pensions is very important to them, and they wish they could just buy stocks like Japanese government instead of trying to pretend being “free market”. There is no “free market” in stocks. Ever since 401Ks got introduced the stock market became a political scoring point. If we could just get past that we could then move on to what can really be done to help the economy instead of trying to paper over stock market.

  • Dimm

    True in general, however I do not recall Krugman being optimistic a week ago.
    Any reference to show he is bi-polar?