Another Bond Market Rally

[adios]

5 year treasury at less than 3% and 10 year treasury at 4% on the close today. Mortgage rates down as well. Higher rates are already factored in from 2 years on out but it's not happening and in fact it's going the opposite way i.e. yields are down not up since the beginning of the year. No job growth, no inflation, no yield I guess.

Bond Rates (http://bonds.yahoo.com/rates.html)

[Wildbill]

I think the market just got hoodwinked into thinking inflation would quickly pass through. The output gap is still an issue and working that off will take some time. Thing is that it may be the last rally, I think people are ignoring the threat of some pretty strong inflation in 12-18 months as the long period at under 2% fed funds will finally bite.

[AceHigh]

Don't you think a soft dollar will contribute to inflation?

I'm worried that the Treasury department isn't thinking through a policy of increased deficits and a weakened dollar, leaving the economy very vulnerable to inflation.

[Wildbill]

Nothing but a bunch of hacks run the place, led by Snow. My goodness I am sure there are good people there, but the leaders stink. Then again what could they do, there is like a 20 foot wall they have to climb just to get an idea pass the lead neocons who had this kind of strategy in mind all along. That is the thing that drives me nuts, I don't think Bush is necessarily that bad, but he must take the blame for hiring a bunch of mostly idiots with extreme agendas. They act like everything is on the brink of collapse, lets just hope their fears don't come true thanks to their policy decisions. Nothing more telling than Mankiw being the big picture guy having written less than 10 years ago that deficits had bad and unknown consequences on the economy, yet here he is defending all the budget deficits as smart policy.

[AceHigh]

The other problem is Bush seems to be totally focused on getting Bush re-elected. I don't think any president has ever been so blatant and obvious about doing whatever he could to get re-elected. Everything is about the short-term. Cut taxes, increase spending, make things look good today, tommorrow be damned. Bush hasn't vetoed one bill that Congress has sent to him.

Has any liberal or whatever type President ever increased spending as much as "conservative" Bush?

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yet here he is defending all the budget deficits as smart policy.

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Yeah, it doesn't matter. If you don't set the agenda you get nowhere in this admininstration. It seems like you have to tow the company line 100% or you are thrown overboard. Bush even got Greenspan to back the deficits. If an "idependent" agency like the Fed can't fight the White House, what chance does the Treasury department have?

[adios]

Basically many interpreted Greenspans remarks today to mean that productivity increases alone will not sustain a recovery, real job growth will need to happen to sustain a recovery.

Fed Plays Down Jobs Data (http://story.news.yahoo.com/news?tmpl=story&cid=568&ncid=749&e=4&u=/nm/20040114/bs_nm/economy_fed_dc)

Fed Plays Down Jobs Data
Tue Jan 13, 7:27 PM ET Add Business - Reuters to My Yahoo!


By Alister Bull

WASHINGTON (Reuters) - Top Federal Reserve (news - web sites) officers said on Tuesday recent weak U.S. jobs data was no cause for alarm and inflation remained in check, backing a conviction that low U.S. interest rates are here for many months to come.

Economists said the Fed's focus on slack in the economy and lack of price pressure showed policy-makers were in no hurry to raise interest rates from a 45-year low of 1 percent, or to cut them again either, despite job market gloom.

Fed Chairman Alan Greenspan (news - web sites) told bankers in Berlin he was not surprised by the meager rise in December payrolls because productivity growth had been so strong. But he said the uptrend in hourly worker output had to fade and when it did, businesses would start hiring.


"This cannot go on indefinitely...it's just a matter of time before we begin to see employment start to pick up quite significantly, as it always has in the past," he said.


Just 1,000 jobs were created last month, data out on Friday showed, versus expectations of a 130,000 gain. Financial markets took fright at the news in case it was a warning that recent strong U.S. growth was not sustainable.

Dallas Federal Reserve President Robert McTeer told Bloomberg television he had shared that shock. But he added the Labor Department (news - web sites) report did not mesh with other surveys that have signaled much stronger jobs growth than reported.


WAIT AND SEE


Fed Governor Mark Olson, speaking in Charlotte, North Carolina, voiced outright skepticism about the numbers, cautioning that they could have been influenced by seasonal factors and the Fed could afford to hold judgment.


"Particularly over the holiday season, there can be some noise in those numbers," he said. "While the (December) numbers were a surprise to the downside, I would say let's look at both December's and January's numbers before we draw a conclusion."


Cleveland Federal Reserve chief Sandra Pianalto, speaking at Kent State University in Ohio, said the jobless nature of the recovery so far had been "puzzling" and might reflect a more fundamental shift in the U.S. economy as businesses worked out how to make the most of new technology.


In the face of this sort of doubt, she said policymakers needed more evidence to gauge what was going on.


"Uncertainty about whether and how the economy might be changing inevitably leads policymakers to look for supplemental indicators to help us understand how to best depict the economic environment," she said.


Economists said this measured response reflected a Fed that felt it could take its time in assessing its next policy move.


"They are into their 'considerable period' and they can just afford to sit back and watch things develop," said Stephen Stanley, senior markets economist at RBS Greenwich Capital Markets in Connecticut.


In August the Fed adopted the stance that it could keep rates low for a "considerable period" and Olson emphasized that this was because inflation was firmly under control.


"There is almost no sense of inflation pressure which is why we were led to believe that the phrase considerable period is still accurate," Olson said.


"We are finding clear indications of economic recovery. But with both the output gap and the employment gap indicating slack in the economy we are not yet noting evidence of inflationary pressures," he told the Charlotte Economics Club.

McTeer agreed the economy was in no danger of upward or downward price pressures.

"I think we're in a sweet spot right now of price stability," he said in a CNBC interview.

[Wildbill]

Don't even get me started on that. When Bush's team put in the steel tariffs I just about went ballistic. It was the most overtly blatant vote buying move I can ever remember. It was so obvious no one has ever talked about in terms other than that. When they lifted them they acted like they had done some great duty, but it was a terrible miscalculation. Now they have people in the steel states pissed off at them and they have the people in the steel buying states never trusting him.

Not that I like Dean or any of the other people, but Bush's team and their agenda make other candidates seem like a breath of fresh air. I could never believe before this a guy that won an election by the narrowest of margins, essentially with Ralph Nader's help in Florida, could think he and his team had a mandate to go out and radically change the course of the country. Most gallingly putting out a mismatch of part populist crap, part corporate sellout, part spending binge, part nationalistic...but always keeping one eye on the 2004 electoral college. Truly disgusting that so many people don't even see it this way. That being the case I guess maybe we all deserve it for being collectively as a nation plain stupid in buying into this all.

[AceHigh]

But ya gotta love the permanent manned settlement on the moon! WTF?

[Wildbill]

Not that I am a huge fan of the editorials in the New York Times, but they had a great little writeup today about Paul O'Neill. I really couldn't say it any better than this:

Read Robert Rubin's recently released memoir and "The Price of Loyalty," Ron Suskind's new book on Paul O'Neill's time in the Bush administration, and a few things become apparent. The first is that Mr. O'Neill would have really liked having Mr. Rubin's job.

Of course, Mr. O'Neill thought he was getting Mr. Rubin's job when George Bush appointed him Treasury secretary, but in fact he was only assuming the title. Mr. Rubin's job, as described in his book, "In an Uncertain World: Tough Choices From Wall Street to Washington," was to analyze an often mystifying world, alongside Alan Greenspan and an insatiably curious president, and to shape domestic and global economic policy accordingly.

Mr. O'Neill, who had been a budget wiz in the Nixon and Ford administrations and a successful chief executive at Alcoa, was able to sift through economic data to his heart's content with his old pal, Mr. Greenspan. But he soon discovered that this was merely an academic undertaking. In addition to the damage that Mr. O'Neill did to himself with his erratic public statements, he was serving in an administration that was not eager to have facts get in the way of policies set by a "praetorian guard" of ideologues surrounding the president.

Mr. O'Neill can't tell you what it feels like to steer the world economy. For that, read Mr. Rubin's book. Mr. O'Neill's is a woeful tale of what it feels like to sit in the office once occupied by Alexander Hamilton and be subservient to people like Karl Rove and Karen Hughes.

"We need to be better about keeping politics out of the policy process," Mr. O'Neill told Dick Cheney, his old friend from the Ford administration who had recommended him for the job early on. In this tale, the Treasury secretary repeatedly implores the vice president to foster a more open and rigorous policy-making process in the White House, but to no avail. These scenes are reminiscent of a spy thriller in which the protagonist warns the head of counterintelligence that there is an enemy mole in their midst, only to discover that his confidant is actually the mole.

Long after the reader has figured it out, Mr. O'Neill finally realizes that Mr. Cheney is the leader of the inner circle, which keeps facts — whether about global warming, the deficit, steel tariffs or Iraq — from getting in the way of policy.

Mr. O'Neill did manage, for a time, to head off talk of a tax cut on dividends. But when the issue comes up once more right after the midterm elections, and Mr. O'Neill again notes that the country cannot afford it, Mr. Cheney cuts him off: "Reagan proved deficits don't matter. We won the midterms. This is our due."

To his credit, President Bush, who is depicted as having a hard time following the discussion, wonders at the same meeting whether he hasn't already given wealthy people enough of a break. That's when Mr. Rove chimes in that the president ought to "stick to principle."

Mr. O'Neill came to feel that he, Christie Whitman and Colin Powell were essentially hired for cover by a president who had pledged to govern from the center, but really had no intention of doing so.

Mr. O'Neill was a Nixonian Republican caught up in a Reaganite restoration. He had admired how President Bush's father, when faced with a dire fiscal outlook, had reneged on his "no new taxes" pledge. And while some Democratic liberals had viewed President Bill Clinton's fiscal discipline as a betrayal, for the likes of Mr. O'Neill it represented the triumph of Republican values.

The new Treasury secretary and Mr. Greenspan shared concerns that even the bulk of the first round of tax cuts in 2001 could prove unaffordable if projected $5.6 trillion surpluses over the next decade turned out to be a mirage (as they did). That's why Mr. O'Neill, whose presidentially conferred nickname was downgraded over time from "Pablo" to the "Big O," tried to get Mr. Bush to agree to condition the phasing in of these cuts on the availability of surpluses.

He failed. "I won't negotiate with myself," the president told his Treasury secretary, as if responsible economic stewardship was a compromise too far.

The White House is upset that a departed cabinet member has provided such an intimate and devastating portrait of presidential decision-making — in an election year, no less. But Mr. O'Neill, who comes across as somewhat naïve and politically tone-deaf in this thick stew of self-justification and insider revelation, also feels betrayed by a White House that discouraged any serious policy debates.

Whether it's Mr. Cheney's energy task force, the supposedly independent commission on Social Security reform or the president's ridiculously scripted Waco economic summit meeting in the summer of 2002, the Treasury secretary continually registered his deep shock at what he rightly considered shoddy, if not dishonest, decision-making.

"When you have people with a strong ideological position and you only hear from one side, you can pretty much predict the outcome," he says of the energy task force. Too often, the fix was in, as when steel tariffs were imposed, and when Mr. O'Neill's post-Enron efforts to make chief executives more accountable for their companies' misbehavior were thwarted by White House concerns about "the base."

When Mr. Cheney finally called to fire his old friend in November 2002, the O'Neill account quotes him as saying, "We'd really like to do this in an amicable and gracious way."

It was clearly too late to start down that road.

[adios]

I know that the NY Times never has an axe grind regarding Bush /images/graemlins/smile.gif. Given the Jason Blair fiasco I don't think the NY Times is real high on being perceived as doing high quality journalism but I digress.

This op ed piece portrays a much different view of the decision making processes in the Bush administration. From Wednesday's WSJ:

The Value of Loyalty

By LAWRENCE B. LINDSEY

Politics can be a rough sport. Paul O'Neill's departure after two years as Treasury secretary was not handled well. His bitterness, some would say, is quite understandable. But bitterness is a bad basis for objectivity, and any of Mr. O'Neill's reported views regarding President Bush and the conduct of economic policy do not comport with my recollection or with the public record. In fact, the president is what he claims to be -- a compassionate conservative -- and one with a grasp of how the world really works.

* * *
I first got to know President Bush in late 1997, when a mutual friend suggested we should meet. We had a series of meetings, each lasting several hours, during 1998 in the governor's mansion in Austin. The discussions were detailed and he was constantly asking penetrating questions, and telling me to "Say it in English" when my explanations were too wonky to be clear.

We shared a concern about the bubble that was developing in the financial markets. His concerns were not just theoretical. As a businessman, he'd suffered through the 1980s energy bubble in Texas and its collapse. Mr. Bush expressed particular concern at the human cost of the downturn, remembering families in Midland who lost their homes. This view that a bursting bubble was both an economic and human calamity shaped the Bush economic program both during the campaign and after his election.

On Dec. 1, 1999, the president unveiled his tax cut, saying that the economy might need an "insurance policy," and adding that "a president should hope for the best and prepare for the worst." This led to a very orthodox approach to handling economic weakness.

On the human side, the tax cut was disproportionately focused on middle-class families with children. The president overrode the recommendations of many of his advisers by explicitly eliminating the taxes paid by single parents supporting children on modest incomes. Being a single mom with kids, he explained, was the toughest job in America.

On Jan. 3, 2001, two and a half weeks before taking office, the president held an economic summit in Austin. Businesspeople and others active in the economy came to give their candid and private views on the state of the economy. Although the official data at the time suggested all was well, these people said that the economy was sliding rapidly. This galvanized the president into pushing for rapid enactment of the "insurance policy" he had campaigned on. Interestingly, the Federal Reserve had reached the same conclusion, making the first of what turned out to be 13 cuts in the federal-funds rate, on the very same day.


Mr. O'Neill joined the administration in late January, without the benefit of this background. Convinced by his own judgment and by the official data that had been released during 2000 suggesting that the economy was doing fine, he sought to minimize the potential size of the tax cut. We now know, but did not know then, that the economy had started its decline in the quarter before the election.

One of Mr. O'Neill's suggestions was to have the tax cut trigger off if the government ran a deficit. The view had two problems -- one process, one policy. Upon taking office, the role of the so-called policy shop in the White House is to implement the program on which the president campaigned and was elected. In all three administrations in which I served, a record was kept of these commitments that may seem inflexible to some. But it is the best method I know of to ensure democratic accountability for those who staff a new administration. While flexibility develops over time as circumstances change, Mr. O'Neill was advancing an idea that had been rejected in the campaign at a time when the governing process is most focused on carrying out the will of the electorate.

Of even more concern to me was the policy implication of the O'Neill proposal. The tax cut was there to cushion the economic downturn resulting from the bubble's collapse. Mr. O'Neill's plan meant that if the downturn was so severe as to cause revenues to collapse, the tax cut would have to be cancelled just at the time the economy needed it the most!

More generally, the policy-making process can be a frustrating one, and Mr. O'Neill certainly experienced that. Many issues arise that do not fit neatly into a single cabinet department's jurisdiction. For example, a trade issue such as steel tariffs affects the Commerce Department and U.S. Trade Representative most directly. But the Labor Department can be involved if firms might fail and their pension plans might be taken over by the government. The Office of Management and Budget can be involved because of budget effects, and the Treasury and the Council of Economic Advisers because of the economic impact.

The White House policy staff organizes these disparate agencies on an issue-by-issue basis, trying to discover and stop unintended consequences from a policy action that a single agency may have overlooked. From time to time, this interagency process looks like a "power grab" to a cabinet officer who sees an issue as being part of his "turf." When disagreements can't be resolved by the policy officials, the buck stops with the president, who makes the final call. Though it can be messy and time-consuming, the country is better served if all angles on a given decision are thoroughly vetted before it is implemented. In two decades of being involved in this process, I've never known anyone who thought they "won" on all the issues they should have.

Two of Mr. O'Neill's most troubling assertions about the decision-making process -- that the president is not engaged, and that he (Mr. O'Neill) was shut out of the process -- are simply false. Every night, the president goes home with a two-inch binder known as the Briefing Book. It contains the background material for each of the president's numerous meetings the next day. Having been grilled on the details in those briefing memos, I can personally attest that Mr. Bush does his homework. Woe is any official who is not prepared, because the president will be. I imagine the case method Mr. Bush learned at Harvard Business School was good preparation.

Each page of that Briefing Book must be cleared through a complex process run by the staff secretary. The White House policy councils must assure the staff secretary that the views of the relevant agencies are accurately portrayed. And since Treasury officials are regularly included in the meetings with the president, they have their own check. If Mr. O'Neill felt that material got to the president that blindsided him, he should have inquired within his own department.

It is in the area of tax policy that Mr. O'Neill seems most aggrieved, both about policy and process. Although he had been ebullient about the economy during much of 2001, 9/11 convinced Mr. O'Neill that business confidence needed a boost. He suggested a 15-point rate cut in the corporation income tax rate for two years. We took the idea directly to the president. But it was a nonstarter -- it just did not comport with the president's view of helping the economy by helping working families directly. This was a policy decision, not a process failure.

During 2002, it became clear that although the first round of tax cuts had ended the recession, the lingering effects of 9/11 and the bubble's burst were still weighing down the economy. Mr. O'Neill favored focusing resources on two big long-term reforms: a complete privatization of Social Security and the abolition of the corporation income tax. Both ideas were examined in detail. Instead, the president opted to propose an acceleration of the tax cuts, which were being phased in over several years. Passed in April, these tax cuts were instrumental in jump-starting the economy in the third quarter of 2003. The economy will continue growing in 2004 on the back of sound policy.

To some, including Mr. O'Neill, those tax cuts were a mistake because they did not make fundamental structural changes. The president instead opted to make modest positive structural improvements while putting money in people's pockets and sustaining economic growth in the near term. But more important, these could be enacted in a timely manner.

A look around the world shows that the president was right. The experience of Japan, which has struggled for a decade trying to make structural changes, is instructive. Its economy has stagnated because the political process has neglected achievable reforms that would also help sustain growth while bigger changes occurred. The obsession of Europe with deficits is also instructive. Needed tax reductions and structural reforms were neglected because of short-term revenue effects. European deficits are high and rising due to economic stagnation, while unemployment is in double digits. America is widely hailed as the world's growth engine because we followed the right policies.

That is why the claim that the president's tax cut was supply-side ideology is so misplaced. The tax cuts met a demand-side need while advancing sensible improvements on the supply side. Radical supply-side ideas like abolishing the corporate income tax were vetted by the policy process and rejected. The process worked as it should, considering a full range of options and then selecting the most feasible.

In spite of our policy differences, Mr. O'Neill and I always got along on a personal basis. He is a smart, well-intentioned man with a long and distinguished career. He thinks big thoughts, and his efforts to combat AIDS and bring potable water to the people of Africa speak to a big heart. The month before he left office, he took considerable personal risk by flying to Afghanistan to advance America's war on terrorism. He, like others who leave private life at the peak of their careers, make a real sacrifice.

So, the circumstances of his departure were regrettable. But so too was his decision to make this book, "The Price of Loyalty," the capstone of his career. The book does a grave injustice to the president, to the truth, and to Mr. O'Neill himself.

Mr. Lindsey is a former director of the National Economic Council.

Updated January 14, 2004

[Wildbill]

I never found Larry Lindsay anything more than a puppy dog to Bush and Karl Rove. Sorry but an op-ed piece by him gets no credibility in my book. Sure some things about O'Neill might be grandstanding by a bitter person, but the fact remains that an independent author, a respected one at that (Andres Martinez), wrote the op-ed piece I copied, not the Times editors themselves. Sure everyone can take whatever side they choose, but I think the bottom line is that I have been disenchanted with the President not so much because of him or his particular actions, but on the actions and attitudes of the people he has under him. We all touched on it before, Karl Rove is just a constant electoral college junkie. Everything is weighed purely for re-election. What kind of BS is that??? I mean when you get elected from the start you should remember public service and public duty are what you are there for. If you do those things well, respect and listen to all you serve, and make decisions based on serving best those that count on you then re-election shouldn't even be an issue. People marvelled at Jesse Ventura and how he acted, but it was an extremely good example of how elected officials should be. They shouldn't be pandering to small groups, regardless of their power to elect them. They shouldn't be spending their 4 years in office to constantly fundraise. And most of all, their motives shouldn't be lets take this slight opening we have and use every trick and bullying method we can to make this an unbeatable majority for years to come. People don't want to elect parties, they want to elect good representatives of their desires and quite frankly this administration has no clue of that.

[adios]

that's one of life's lessons to me.

[Wildbill]

That is where I live and I wish one of these politicians would realize most of us do live pretty close to the middle.

[AceHigh]

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They shouldn't be pandering to small groups, regardless of their power to elect them.

[/ QUOTE ]

I wonder if all this pandering to single issue groups will back fire. Conservatives can't be happy with the new immigration bill Bush is backing in an effort to woo Latinos. The new NASA bill and Pro-Marriage bills are just lousy ways to spend the countries resources.

At some point, GW may drive the moderate Republicans and Independents to the Democratic canidate. Fiscal conservatives have talked about supporting Dean, because spending can't go up anymore under Dean than it would have under Bush and Dean will have more of a balanced budget.

[adios]

"Long term, there is no comparison between bonds and equities."

Yep that's true but bonds are less risky supposedly. Based on 20+ year holding periods I'm sure some would dispute this notion. Depends on one's utility function (aversion to risk) and desired returns. In general I don't like bonds too much at this juncture FWIW.