econ recap- Fed driven sell off

As previously suggested, the Fed doing anything would cause markets to believe it’s all going bad out there.

However, the US economic news still looks like modest improvement,
so I still suspect the reaction to the Fed will be temporary, and start wearing off around noon Eastern time today.

q3 still looking up from q2 which was up from q1.

And gasoline prices now moving lower help the consumer a bit more,
so q4 should be up more than q3.

With GDP sequentially better all year, makes sense to me that earnings in general will continue to grow.

Employment not doing much as there is still some underlying productivity growth
which also helps keep unit labor costs in check.

This means stocks still be in their ugly trading range, with the lower bound somewhere around current levels.

Though potential external shocks remain.

With the ECB again writing the check today by buying Italian and Spanish bonds
the current situation is in fact operationally sustainable, and I suspect what we are seeing
is the resolution. The ECB buys as needed in conjunction with imposing austerity,
and the euro zone muddles through with flat to modestly negative growth and deficits higher than they’d like.
Note too, that the ECB buys bonds are relatively high yields, and pays relative low rates of interest on the clearing balances it creates
to make the purchases. This results in a profit for the ECB that adds to their stated capital and their stated capacities.
So as long as they keep buying there’s no default and not only no losses, but rising ECB profits.
And there’s no inflationary consequences because none of this increases actual spending by the national govts.
All it does is allow them to fund their austerity budgets as dictated by the ECB.

China continues to decelerate and so far avoid reporting a hard landing,
and while the jury is still out on that score, trade and demand growth is slowing.
They know how to increase demand but are holding back due to concerns of inflation.

Commodities are finally selling off and heading towards their marginal costs of production,
just as the textbooks describe, as global tight fiscal keeps demand in check.

And with seemingly no one in any position of responsibility understanding how their monetary systems work,
and instead carrying on as if they were all operating under some sort of fixed exchange rate constraint,
the odds of an acceleration in aggregate demand any time soon remain remote.

Initial jobless claims dropped by 9,000 to 423,000 the week ended Sept. 17, as expected. Continuing claims fell by 28,000 to 3,727,000 in the week ended Sept. 10. The four-week moving average of new claims, a more reliable indicator of the labor market’s recent performance, rose by 500 to 421,000

 
FHFA House Price Index Up 0.8 Percent in July

 
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in August to 116.2 (2004 = 100), following a 0.6 percent increase in July and a 0.3 percent increase in June.

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9 Responses to econ recap- Fed driven sell off

  1. Walter says:

    Hi Warren,

    ECB keeps saying their policy is temporal. Hence the ongoing market uncertainty. Seems to me ECB waits for the day the EFSF will take over the bond buying. This EFSF however, unlike ECB, will not have unlimited spending power.
    Do you expect the ECB to continue parallel to the EFSF?
    If not what consequences this handover to EFSF may have?

    Reply

    WARREN MOSLER Reply:

    if it turns out the efsf does take over and stumbles the ecb will back it up one way or another.

    they will do whatever it takes to keep things going, and they know the ecb has unlimited buying power

    Reply

  2. Max says:

    “Financial markets have a very safe way of predicting the future. They cause it.” – George Soros

    Reply

  3. Greg Marquez says:

    I wonder if the stock market staying up isn’t what is keeping the government from acting to do something to help the economy and the unemployed. Maybe a stock market crash might encourage the nit wits in charge to actually do something.

    Reply

    Dan Furlano Reply:

    @Greg Marquez,

    Isn’t it a little naive to think that if the market actually crashed politicians would do anything more than blame each other as they spin their ideologies?

    Reply

    Greg Marquez Reply:

    @Dan Furlano, I guess what I’m trying to say is that there might be more people clamoring for the government to do something if someone besides the poor and unemployed were having a bad time of it.

    Reply

    Gary Reply:

    @Greg Marquez,

    unless some people actually expect markets to crash and making money of it?

    My guess is that Republicans actually want economy to get really bad under Obama. So it would be easy to win, for their contenders are unelectable (too fascist) otherwise.

  4. Dan Furlano says:

    Maybe this is what they are nervous about:

    http://www.nytimes.com/2011/09/22/us/politics/house-defeats-stopgap-spending-bill-with-disaster-relief-hanging-in-the-balance.html?_r=1&hp

    WASHINGTON — House Republican leaders suffered a surprising setback on Wednesday when the House rejected their version of a stopgap spending bill, leaving unclear how Congress will provide money to keep the government open after Sept. 30 and aid victims of a string of costly recent natural disasters…

    Reply

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