Daily Investment Interpretations
July 21, 2010
Stock markets fell today after less-than-encouraging words from Fed
Chairman Bernanke: Bernanke view riles Street.
Dr. Bernanke "failed to articulate any further steps to spur growth, as
some had hoped". Fed stands ready to act.
The NASDAQ Composite fell 35.16
to finish at 2,187.33. The Dow lost 109.43
to close at
and the S&P 500
parted with 13.89
to end at 1,069.59. Oil ended at $77.75 a barrel,
closed at $1,192. The VIX added 1.71
"Federal Reserve Board Chairman Ben Bernanke said Wednesday that the outlook for the U.S. economy is "unusually uncertain" and that the Fed is willing to do more if growth proved to be weaker than forecast."
Mark Hulbert observes that sharp drops in consumer confidence are more often than not, followed by stock market gains: Consumer confidence for contrarians
2010-7-21 (Afternoon): Dr. Krugman has added this item, Permanent Link to Remote Control, about the way the media distort reality. An Associated Press article states: "Even though the prospects of deflation — a widespread and prolonged drop in prices for goods, the value of stocks and homes and in wages — is remote, some Fed officials are worried about it." Dr. Krugman asks: how remote is deflation is, given this chart?
Paul Krugman's charts showing that FDR's "New Deal" paid for itself (Permanent Link to Depression Debt) suggest a little further attention:
Incidentally, the reason that the national-debt-as-a-percentage-of-GDP exploded during the Hoover Administration wasn't because the Republicans were spending so much but because the country's GDP was falling so fast. And the reason that national debt leveled off when the FDR Administration was spending so much on fiscal stimulus was because the country's GDP was rising so fast.
Dr. Krugman also included a chart (Permanent Link to More Depression Debt, see below) showing the cost of servicing the national debt under FDR:
The cost of servicing the national debt peaked the year FDR took office.
In my experience, there's a great deal of public confusion over the national debt. For decades, if you wanted to make mail order money, all you had to do was warn about the way politicians kept adding to the national debt each year, spending more and more annually, rather than paying down the national debt. "This fiscal folly can't continue!" you would thunder. "The country is on its way to bankruptcy, and for only $99.95 a year, I'll show you how to survive and prosper during the coming economic breakdown." But of course, politicians can safely keep adding to the national debt each year as long as long as the ratio of national-debt-to-GDP doesn't rise. Also, interest rates play a role. Relatively low interest rates mean relatively low costs to the government of servicing the national debt.
The three squibs below recount Goldman Sachs forecasts for the economy.
Four days ago (Permanent Link to De Facto Double Dips), a Goldman Sachs analyst estimated the growth in GDP for the second half of 2010 at 1½ %.
Two days ago, another Goldman Sachs research report (Permanent Link to Why I Worry) estimated that the federal fiscal stimulus program has added 2½ % annualized to the U. S. economy through last month. Going forward, they estimate that GDP growth during the last half of 2010 and the first half of 2011 will be about 2¾ % less than it was in the first half of this year provided that
(1) additional federal aid is provided to state and local governments to help them through this "time of troubles";
(2) unemployment benefits are extended; and
(3) Most of the Bush tax cuts aren't allowed to expire this year.
This morning, Goldman Sachs has concluded (Permanent Link to Fiscal Drag) that federal aid to state and local governments won't be forthcoming, and that that will subtract almost another percent from the rate of growth of GDP over the next year... or not quite 3¾ % less than it was in the first half of this year.
Does that sound like recession?
Later: The Fed is forecasting GDP growth of 3% to 3.5% this year, while private economists are projecting 2.6%.