By entering into an agreement with Bashar Assad to destroy his chemical weapons, Obama is encouraging dictators to not only develop chemical weapons, but selectively use and trade them for respectability as needed. Moreover, by elevating the regime to that of a partner in a long disarmament process, a dictator that should have been punished is rewarded with credibility. Lastly, new chemical weapons are easy to make the second time.
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Varying Interest
All interest rate increases aren’t created equal. A rise in 10-year treasury rates from 2%, where they are now, to 3% or 4% is a sign of improving business conditions and opportunities resulting from a strengthening economy. By contrast, a rise in rates from, say, 5% to 7% or 8% is a sign of an overheating economy that is creating systematic inflationary pressures and must be cooled.
Fractious Fed
With the Fed (and everyone else) forecasting improved economic conditions in the second half of ’13, it’s not surprising that the Fed again reiterated that it MAY start tapering QE3 later this year. Interestingly, the Fed has been consistently over-optimistic when it comes to forecasting. Thus, I still think tapering commences no earlier than November. But, if monthly job creation numbers stay above 183,000/month, tapering could commence in September.
Gassing Up
Retail sales jumped 0.1% in April and while not great, it beats the 0.5% decline in March! Moreover, it shows that consumers are spending despite the sequester and the payroll tax increase. And a key reason was the huge 3.5% decline in gasoline prices, the largest monthly drop in a decade. If sustained for a year, lower gas prices would save consumers $15 billion/year and boost GDP by 0.1% singlehandedly.
Dangerous Debt
The take-away message from the Reinhart-Rogoff error is that research mistakes happen, that higher debt levels are correlated with slower GDP growth, and that there is no debt threshold, 90% or otherwise, above which growth dramatically collapses. Rather, as the debt/GDP ratio rises, growth rates systematically decline. The key unanswered question of the research is do higher debt levels reduce growth, or does slow growth cause higher debt levels?
Tough Taxes
The Friday File: Every percentage point increase in state income taxes faced by free-agent baseball players raises their salary by $22,500/year. By contrast, the same tax increase reduces slightly the average skill level of free-agent basketball player signings. It’s because baseball teams have no real salary cap, while basketball teams are very constrained. Thus, basketball teams in low-tax states effectively have a higher salary cap and sign better players.
Finally!
Next week the European Central Bank will finally lower its key interest by a quarter-point to 0.5%, as the euro-region recession continues. Most importantly, Germany, Europe’s largest economy, may now officially be in recession and business confidence is slumping. Meanwhile, across Europe, purchasing managers are indicating continued contraction and exports to China are slowing. While the rate reduction will not really change things, it’ll provide a psychological lift.
Happy Housing
In yet another sign the housing market is strengthening, the number of distressed sales (foreclosures and short sales) has declined dramatically. Moreover, short sales now generally outnumber foreclosures in most cities, a far cry from the situation just last year. Even if existing home sales don’t increase much in 2013, the fact that distressed sales are being largely replaced by conventional sales means the market is on the mend.
Down Data
Retail sales fell a surprisingly large 0.4% in March, the biggest decline since 6/12 and the preliminary University of Michigan Index of Consumer Sentiment declined to 72.3 in April from 78.6 in March. Worse, February retail sales were cut by 0.1% and January sales by 0.3%. This shows that the payroll tax increase is starting to bite. Add the impact of the sequester, and Q2 GDP will be below 1.75%.
Masterful Musicians
The Friday File: On 12/5/12, jazz great Dave Brubeck died at age 91 and on 2/27/13 Harvey Lavan Cliburn, Jr. known best as Van Cliburn passed at age 78. Brubeck’s 1959 album “Time Out” was the first jazz album to sell over a million copies, while Cliburn’s recording of Tchaikovsky’s Piano Concerto #1 in 1958, which won the International Tchaikovsky Competition, was the first classical album to do the same.