In Between Days

by CC August 10, 2011 12:24 am • Commentary



  • 7:00 a.m. ET: We get weekly mortgage-applications data from the Mortgage Bankers Association. Low rates, no takers.
  • 10:00 a.m.:  Wholesale sales and inventories for June. I fell asleep for a moment there.
  • 10:00 a.m.: The Labor Department releases its JOLTs job-openings data for June. Hint: There are none.
  • 1:00 p.m.: The Treasury Department has some 10-year Treasury notes it wants you to buy. You probably will.

Earnings: We get reports from:

  • Macy’s
  • Cisco Systems
  • Harman International
  • Computer Sciences
  • News Corp.


  • In the absence of very much in the way of interesting news, attention will drift back to Europe and to navel-gazing about whether the Fed statement was really a good reason for a big rally.


It was a wild Tuesday on Wall Street. The S&P 500 rallied until mid-day then began retracing in advance of the FOMC minutes. The initial reaction was a selloff, with the intraday low down 1.60% from yesterday’s close. But at 2:45 PM the trend reversed directions and the index closed the day with a gain of 4.74%. The index is in the red year-to-date, down -6.77%, which is 14.01% below the interim high set on April 29.

From an intermediate perspective, the index is 73.3% above the March 2009 closing low and 25.1% below the nominal all-time high of October 2007.


Whether the Federal Reserve’s decision to keep rates on hold into 2013 will make banks any more comfortable lending is an open question. But for the moment, it seems to have made investors more willing to hold stocks. Here’s why.

Mid-2013 isn’t a random date — it’s two years from now. In other words, if you own two-year Treasurys the Fed just guaranteed that you’re not going to get sideswiped by an increase in rates. So investors drove the price of the two-year up, pushing its yield down from 0.256% to a new record low of 0.185%. Longer-dated Treasurys rallied as well — the 10-year yield dropped from 2.339% to 2.170%.


At the root of today’s credibility deficit is a failure to come to grips with the long, slow growth period that is typical of post-financial crisis recovery. Too many decisions, for example the recent withdrawal of monetary stimulus by the European Central Bank and the US Federal Reserve have been predicated on overly rosy growth projections. Time and again, policymakers counted on rapid post-crisis recovery to help them avoid painful decisions on how to deal with badly overstretched private and public balance sheets, whether household debts in the US or sovereign debts in the periphery of Europe. Time and again, rapid growth did not materialise or – if there was a burst – did not last. Every effort to delay a critical decision has ended unsatisfactorily. One is reminded of the Peanuts cartoon character Charlie Brown, who never seemed to figure out that his place holder Lucy would always pull the ball away at the last minute so as to enjoy watching him lose his balance. So the downturn has treated US and eurozone leaders, with each successive stumble further undermining their credibility.

By far the main problem is a huge overhang of debt that creates headwinds to faster normalisation of post-crisis growth – that is why post-financial crisis growth is typically very slow. It is better to think of the global economy as going through a “Second Great Contraction” (the Great Depression being the first) involving credit and housing, and not just output and unemployment.

Indeed, the question of whether the largest advanced economy regions are going to experience a double-dip recession is almost moot. For all intents and purposes, most European and US economies have never fully exited the downturn, with output per capita still below its pre-crisis peak.