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Nick Godt's Market Medics
Aug. 25, 2010, 8:57 a.m. EDT · Recommend (2) · Post:
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Bonds aren't the new tech bubble
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Power to the people, will they use it?
By Nick Godt, MarketWatch
NEW YORK (MarketWatch) -- A yearly gathering in the mountains of Wyoming of central bankers and economists -- be they academics, policy makers, or those employed by investment banks -- sounds innocuous enough, an effort likely to yield reflections on the past and distant aspirations for the future.
But for the markets, given how quickly the already-shaky recovery in the U.S. economy seems to be turning into an outright slowdown, anything close to apathy is going to be the clear and present danger.
The bond market, which tends to reflect economic expectations much more accurately than the stock market ever did, is clearly signaling a slowdown -- or worse -- not to mention growing risks of deflation.
Yields on benchmark 10-year Treasury notes /quotes/comstock/31*!ust10y (UST10Y 2.53, +0.04, +1.48%) , which act as a barometer of growth and inflation expectations, have been falling since April, their slide accelerating during August all the way to 2.50% on Tuesday. Read more on bonds.
The stock market, meanwhile, after receiving a shot in the arm from second-quarter corporate earnings reported in July, has recently begun to smell the coffee as well.
The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,047, +6.81, +0.07%) has slumped back below 10,000 after falling for two straight weeks, along with the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,052, +0.34, +0.03%) , the broader U.S. equities gauge. And global markets have been falling in sync.
A plunge in sales of previously owned homes for July reported Tuesday was just the latest of an ever-worsening stream of U.S. economic reports -- from employment, to consumption, sales and housing. Read more on existing home sales.
And yet, an ideological bias toward inflation risks and against government spending and lending, even when no one else is stepping in to spend and lend, seems to have crept into the thinking of policy makers at the Federal Reserve.
It might be a particularly bad omen that Thomas Hoenig, president of the Federal Reserve Bank of Kansas City which organizes the Jackson Hole, Wyo.-annual meeting, is also the leader of dissent within the central bank's voting committee on monetary policy and interest rates.
A long-time hawk on inflation and deficits, he has argued that even in the face of recession and massive unemployment, the Fed should raise interest rates and that the government should worry about spending.
If that doesn't sound familiar, it should: That's exactly how advocates of austerity, intending to expunge past excesses, engineered a second leg to the Great Depression in the 1930s.
The flash crash put Wall Street regulation back on center stage and we've had successive rounds of it, but as Simon Constable asks, "Are we any better off?" WSJ's Dennis Berman explains why we're not.
Those who oppose government spending at all costs have already succeeded in blocking much-needed additional fiscal stimulus.
Now, it should be up to the Fed to be all-out with easier monetary policy -- and even to dare suggest to Congress that more fiscal spending is necessary.
But although it's anyone's guess what Chairman Ben Bernanke will say on Friday during his Fed keynote address at Jackson Hole, it looks like the sit-still approach is going to carry the day.
According to a Wall Street Journal article on Tuesday, Bernanke and his fellow Fed policy makers were highly divided about the baby step it took to keep the central bank accommodative toward economic growth at their Aug. 10 meeting. See the Wall Street Journal article.
With the Fed's key interest rate unable to go lower than the near zero level where it's been since December 2008, markets have been waiting for the U.S. central bank to boost its purchases of debt, thus resuming so-called quantitative easing measures.
But divisions within the Fed seem to have left it paralyzed and waiting for further evidence of how badly the economy is doing before contemplating taking any action.
Jean-Claude Trichet, Bernanke's counterpart at the European Central Bank, is also due to speak Friday. The recovery in the European economy remains at risk but given how the urgency of the debt crisis there ebbed earlier this year, it's likely both central bankers will try to put up a show of confidence about the global economic recovery.
Still, as long as the economic data worsen and the Fed remains on the sidelines, markets aren't likely to buy any of it.
Nick Godt is MarketWatch's markets editor, based in New York.
Institutional shareholders. It's hard to think of a more powerful interest in the corporate landscape. Unfortunately, it's also hard to think of an industry more benign when it comes to change, writes David Weidner.
11:46 a.m. Today11:46 a.m. Aug. 25, 2010 | Comments: 5
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