Current GDP: Worth a Second Look
Since the high volatility sell off in late February, we’ve seen the equity market cast most economic data aside, and continue to stampede higher. The Dow is in spitting distance of 13,000 despite the evidence of impending recession. Whether we look at housing (we won’t bother you with more housing charts this week), capital spending, the activity surveys, retail sales, surveys of consumers and businesses, all signs point to slowing growth, if not recession. There’s an old saying (Gerald Loeb’s 1965 edition of Battle for Investment Survival is the earliest we know of it being in print, but even he said then it was an old saying) that what the market knows isn’t worth knowing. We suppose the market knows the economy is going into recession and couldn’t care less. The well telegraphed onslaught of leveraged buyout money and merger mania (and the rumors of buyouts and mergers that were never going to happen) combined with various government bailout programs have assuaged whatever it was that got the better of the broad market indexes just two short months ago.

April, 09 2007 Can’t Keep ‘em Down
The holiday shortened trading week ended with the announcement of 180,000 jobs created in the month of March. Never mind that most of those jobs were created via the net birth/death model that attempts to guesstimate the number of new businesses created that are unavailable to the good folks at the BLS to capture in the establishment survey, never mind the continued tremendous contributions to employment from the hiring of state and local governments, this report exceeded economists’ expectations, and that was all that mattered. S&P 500 futures tacked on another 6 points, while the treasury market was tattooed to the tune of 10 basis points. At face value the report was strong, and apparently face value is value enough. The markets quickly forgot prior weakening, economic reports: namely ISM. Both the manufacturing, and more surprisingly, the non-manufacturing sectors of the economy were reported to be slowing beyond general expectations. These reports were pretty much shrugged off on the days they were released after a bit of early selling, as the leveraged buy out and merger activity stole the show. The media interpreted the 0.7% pending homes sales as a sign things were improving in real estate, completely ignoring 1). The fact that year-over-over sales continue to fall at a near double digit when not seasonally adjusted data are used 2.) Huge downward revisions to the prior month allowed for favorable reading in the current month and 3.) A growing portion of existing home sales are sales of foreclosed homes at auction (15% of California home sales in March were foreclosure sales according to Foreclosure Radar, by way of Calculated Risk). This last bit was summarily dismissed by the main stream media.

March, 16 2007 Fed at a Pivot Point
Whether they admit it, or even realize it, Professor Bernanke et al stand at the fork in the road, and neither path is very inviting. The first path is to give up the notion that economic growth will not be severely retarded by the collapse of the housing market, and to be forthright in admission that the slowdown has not bottomed, is real, and quite likely to spread. Though we cringe at the thought that we are gaining much company in this view, it is in all likelihood that this is the most probable outcome given the information at hand. The second path the Fed may take is to hold the line that they have taken, that the housing slowdown is safely quarantined, leaving other areas of the economy free to expand at a pace far enough above trend to potentially spark inflationary pressures.