Wow. Catch you up, first, in case you spent the week inadvertently locked in an airliner commode. The 10-year T-note at one point traded at 2.03 percent, down by one-third in three weeks, the largest percentage move ever.
Standard & Poor’s might have studied Kafka: "In a battle between you and the world, bet on the world." Dear S&P: If you want to write a letter to the editor critical of U.S. politics, fine. If you want respect as a credit-rater, act like it.
The Fed’s Open Market Committee made one of the three most important announcements in its history (the other two: former Fed Chair Paul Volcker’s decision, in October 1979, to let interest rates go as high as necessary to defeat inflation; and the QE1 announcement at Thanksgiving 2008). Aside from the conditional commitment to keep the Fed funds rate at zero for two more years, Fed Chair Ben Bernanke settled hash within the Fed.
All spring and summer, the Fed said that temporary factors (gasoline and Japan) had slowed the economy, and that despite uncertainty and without further Fed action, the second half of 2011 would improve. This reassurance had the feel of false agnosticism, a sop to some regional Fed presidents who want a sit-still Fed.
Tuesday’s post-meeting statement contradicted (dismissed … derided …) the earlier ones, in the manner of a chairman who has lost patience with a minority. Three of those presidents — relics of the Fed’s 1913 founding — dissented, the most since 1992: Narayana Kocherlakota, loopy academic in Minneapolis; Charles Plosser, the punishing you’re-on-your-own in Philadelphia; and Dallas’ slicked-back Richard Fisher, yahoo urban-cowboy caricature of a central banker.
These three might have considered, given the example of S&P, one principle of managing national emergencies. If you are in the minority after a policy decision, your self-importance must not undermine concerted action. Thus: SHUT UP.
Much as I admire the Fed’s courage, and wish that monetary gyrations alone would work, we need credit. And that requires relief from regulatory hysteria at all levels.
New economic information was thin, but important: Despite the Fed’s grim statement, nothing here confirms a double dip. The NFIB small-business survey was no worse in July than the two prior months, despite good reason; July retail sales rose a half-percent, the weekly measure of unemployment claims is ever-so-slightly improving, and gasoline is about to slide toward three bucks.
The primary cause of this market chaos is Europe, and the fatal virus moved to its circulatory system, its banks. Societe Generale stock has tanked from a 2011 high at 52 to 22, Deutsche Bank from 49 to 29, Banco Santander from 9 to 6, and Intesa Sanpaolo from 10 to 4. All are packed with sovereign bonds not worth face value.
Next week, French President Nicolas Sarkozy will meet with German Chancellor Angela Merkel (both have left their vacations!), and news that Germany has neither the will nor the power to bail out the rest of Europe will not play well. At best, frantic austerity will push all but Germany and Holland into recession.
While we are preoccupied with ourselves and Europe, China is focused on trade racketeering. Its June trade surplus was $22.3 billion — the $26.7 billion excess with us (half of our total deficit) more than covering China’s deficit with the rest of the world. China’s July surplus soared to $31.5 billion. China’s internal "non-tariff" barriers aside (subsidies to exports, exclusion of imports), and Li’l Timmy Geithner yapping at its ankles, the yuan undervalued at 15 cents last year has yet to reach 16 cents.
Hanging over everything is the life-trial of President Obama. Any CEO will testify that crisis management is an art form, some gifted, some not. All would concur: Any plan executed is better than no plan. Obama said Monday, "I intend to present my own recommendations over the coming weeks." Today, he offered, "There is nothing wrong with our country — there is something wrong with our politics." One incredibly late, one absurd.
Since taking office, Obama has given priority to his agenda over first-class economic emergency. House Republicans now hold a veto. Given a divided Congress and people, the president must move toward the center to get anything done, no matter what he and his party’s base prefer. May he find himself as fast as possible.
The vertical line below has passed through S&P’s head, hitting nothing.
Source: Federal Reserve Bank of St. Louis.