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FOR SOME REASON, the elite can only meet to ponder the world's woes at posh, mountain resorts.
Each winter, billionaires, academics, politicians and assorted dilettantes convene in Davos, Switzerland to hash out the great, weighty problems of the day.
And at the end of every summer, policy-makers and academics head to Jackson Hole, Wyo., to ponder the economy and what to do about it. The confab, hosted by the Federal Reserve Bank of Kansas City (one of two district banks based in Missouri but whose territory extends all the way to Wyoming), gets under way this week.
Why the high and mighty have to gather at posh ski resorts to debate the questions of the day isn't obvious. Having a meeting somewhere on the Gulf Coast might give a needed boost to the economy of a region battered by the BP oil disaster. Next winter, how about moving the Davos confab to Athens or Dublin, where they could really use the dough? Or do the high and mighty need the thin air of posh ski resorts in order to exchange their weighty ideas?
As usual, the highlight of the Jackson Hole confab will be the keynote address by the Fed chairman. When Ben Bernanke takes the podium Friday morning, the whole world's attention will be focused on him—even more so than usual.
The economic data lately have been so bad that expectations are rising for the Fed to do something, anything. Every data point on employment and housing since midyear has fallen short of expectations; in some cases, far short.
Indeed, JP Morgan Chase economist Michael Feroli called the July durable-goods order report released Wednesday "disastrous." The numbers showed "core" capital goods (excluding defense and aircraft) down 8% last month, the most since January 2009, when the economy was in free-fall after the financial crisis. Feroli writes the data raises the risk the economy is growing at less than a 1% annual rate in the current quarter.
That comes after a one-two punch of horrific news from the housing front. After Tuesday's report of a massive, 27% plunge in home resales came word of 12% drop in new-home sales to the lowest pace on record. And even with record low mortgage rates, there is little reason to expect a rebound in the near term.
That's because of the huge overhang of unsold homes, both new and previously occupied, available for sale. Based on the current sales pace, there is over a year's worth of sales of existing homes on the market. And even though homebuilders have slashed construction, there still are over nine months' worth of sales of new homes on offer.
This is the crucial difference between this cycle and every other recovery since World War II. Low interest rates could reliably be counted on to spur a recovery in housing, with renters moving into their own houses and sellers moving up to new or bigger homes when mortgage rates dipped. And everybody would buy appliances and furnishings for their new digs.
No more; this chain reaction has been broken. Housing is the problem rather than the solution to this slump. And business capital spending looks "atrocious," according to JPM's Feroli. So, it seems expectations are rising that new stimulus could be on the way.
Fiscal policy seems to have done all it can do. According to the Bank Credit Analyst, fiscal drag will deduct 1.25-1.50% from third-quarter gross domestic product and 1.25%-2.5% from fourth-quarter GDP, based on Congressional Budget Office estimates. Next year should see an additional 1% sliced off by the reversals of the Bush tax cuts.
That leaves the burden on monetary policy. BCA suggests expectations of further Fed accommodation have helped pushed down long-term interest rates on government and corporate bonds, though this has not helped the broader economy. Fed policy also may work to drive down the dollar, BCA adds. Given that consumption, investment (including residential real estate) and government spending are constrained, the only remaining source of growth would be net exports.
Markets may be sniffing this out. Gold has been perking up, rising from $1150 in late July to a two-month high over $1240. That would be consistent with new monetary initiatives that Bernanke might hint at in his Jackson Hole speech Friday.
But equities also are on to the weakness in the U.S. economy. Small-capitalization stocks have been hit worse than big-cap issues. The Standard & Poor's 500 companies derive about half their business outside the U.S. while smaller companies tend to be more dependent on domestic demand. From Aug. 9 through Aug. 24, the iShares Russell 2000 exchange-traded fund (IWM) fell 9.5%, more than half again the 6.2% decline in the S&P 500 SPDRs (SPY.)
All eyes will be on Ben Bernanke at Jackson Hole Friday as he explains the Fed's plans to deal with the deteriorating outlook. Compounding the pressure will be the release of revised second-quarter gross domestic product data earlier that morning, which could be show growth of about half the advance estimate of an already tepid 2.4% annual pace.
Meanwhile, reports in the Wall Street Journal indicate seven of 17 Fed governors and presidents present at the Aug. 10 meeting of the Federal Open Market Committee weren't fully on board with the decision to reinvest maturing mortgage securities into Treasuries. That was a key measure to prevent a contraction in the central bank's balance sheet, which would have drained liquidity from the financial system.
Bernanke will have to deliver a message that bolsters the flagging confidence of investors and the general public alike—just as the nation heads into height of election season. There are easier ways to score a vacation at a posh resort.
E-mail: randall.forsyth@barrons.com
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