For economic commentary and market analysis, go to the Bonddad Blog

I’m not one who usually criticizes the Federal Reserve’s ideas or policy. This is an organization that is filled with some really bright people who have a very thorough understanding of economics and the economy. However, the Federal Reserve does have an underlying policy that makes little to no sense. Regarding inflation, the Fed focuses on core rather than total inflation. Below I will explain why this is a a bad policy idea and how this policy is damaging the middle class.

It looks as though there is a split within the controlling shareholders of the WSJ. According to the latest news, the younger shareholders are interested in selling while the oldest shareholders are holding off. While any reports of the inner-workings of the controlling interests are by definition questionable, there is one fundamental point to all of this. The Wall Street Journal is a bastion of great business and economy reporting. Selling this paper to News Corp would mean an incredible loss the the US newspaper and business community.

First -- let's skip the debate about the editorial page. I rarely read any WSJ editorial and when I do I am almost always less than impressed (to say the least).

Rudy recently made the following comment:

"This would be an astounding, staggering tax increase," Mr. Giuliani told reporters yesterday after a visit to a restaurant on the edge of California's Silicon Valley. "She wants to go back to the 1990s. ... It would hurt our economy. It would hurt this area dramatically. That kind of tax increase would see a decline in your venture capital. It would see a decline in your ability to focus on new technology."

It shows a complete ignorance of what actually happened in the 1990s, which was one of the best economic periods we will see in out lifetime.

This article is a compilation of articles from my blog, the Bonddad Blog

We've had a fair amount of news on the housing front over the last few weeks, and none of it is good. It all points to the continuing downtrend of the housing industry with a rebound still far off.

From Bloomberg:

Home prices in the U.S. dropped last quarter for the first time in almost 16 years, as 13 out of 20 cities reported declines in March.

Below is a compilation of articles I posted on my blog, the Bonddad Blog

Housing is still showing big weakness. While yesterday's new home sales numbers were supposedly good, I think they are highly suspect. I will explain why below. In addition, today's new home sales numbers continued to show weakness. Short version? Housing is still not in a good place.

From Bloomberg:

Purchases of new homes in the U.S. unexpectedly jumped in April by the most in 14 years, a sign low lending rates and incentives may be reviving demand.

The following is a compilation of posts from my Blog, the Bonddad Blog.

The hits just keep coming in the housing market. For all of those calling a bottom, well, it just isn't happening yet. The news continues to indicate the housing market will continue to disappoint for the foreseeable future.

From Bloomberg:

U.S. home prices tumbled to a two-year low in the first quarter, with declines in almost half of U.S. cities, the National Association of Realtors said.

For market and economic commentary, go to the Bonddad Blog

From CBS MarketWatch

A sell-off in commodities -- from copper to crude oil -- over the past few sessions is telling some veteran market watchers that a slowdown in economic growth, likely one of considerable magnitude, is already underway.

In the last two days alone, commodity prices seem to have fallen off a cliff. Copper futures, which tumbled 7.7% on Wednesday, fell another 1.8% on Thursday -- and have dropped 27% from their December highs.

As one of the main architect's of the Clinton economy, it's vitally important to review Robert Rubin's work in order to understand what can be done in the future. In short, Rubin's policies worked. It's that simple.

First, let's start with the balanced budget, which was part of Clinton's plan from the beginning of his Presidency.

The following is from On the Edge, by Elizabeth Drew, page 60:

Following the election [during the transition], Clinton realized there was little he could do about raising spending for his investments if he didn't tackle the deficit.....He [Clinton] gradually came to see that the debt posed a threat to what he wanted to do to spur competitiveness and economic growth, as well as to revive the economy, and was using up capital that could otherwise go to public and private investment.

Jim Webb wrote an editorial for the Wall Street Journal today titled Class Struggle.  And damn if he didn't hit the ball out of the park on this one.  His statements are dead-on accurate and clearly outline the basic problems of economic inequality in the US.  Thank-God he wrote this editorial.

There are a ton of excellent points in the editorial.  I want to highlight just a few.  However I encourage you to read the whole editorial for yourself because it is that good.

The most important--and unfortunately the least debated--issue in politics today is our society's steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country. Few among them send their children to public schools; fewer still send their loved ones to fight our wars. They own most of our stocks, making the stock market an unreliable indicator of the economic health of working people. The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.

Speaker Pelosi,

First, I wanted to offer my congratulations regarding the recent election.  You were one of the architects of our victory, for which I and the American country as a whole are extremely grateful.

However, you will assume power at a very difficult economic time.  Below are the problems you face.  None offer easy answers.  In fact, solving these problems will cause a fair amount of pain and difficulty, which may harm our majority's future electoral prospects.

A Slowing Economy

To top off the problems of a fiscal situation in tatters and an international trade deficit, the US economy is clearly slowing possibly moving into a recession.

Overall GDP growth is clearly decelerating:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.6 percent in the third quarter of 2006, according to advance estimates released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 2.6 percent.

Speaker Pelosi,

First, I wanted to offer my congratulations regarding the recent election.  You were one of the architects of our victory, for which I and the American country as a whole are extremely grateful.

However, you will assume power at a very difficult economic time.  Below are the problems you face.  None offer easy answers.  In fact, solving these problems will cause a fair amount of pain and difficulty, which may harm our majority's future electoral prospects.

First I discussed the ruinous federal budget situation.  Below is a discussion of the trade deficit, which is just as dangerous.

The Trade Deficit

Speaker Pelosi,

First, I wanted to offer my congratulations regarding the recent election.  You were one of the architects of our victory, for which I and the American country as a whole are extremely grateful.  

However, you will assume power at a very difficult economic time.  Below are the problems you face.  None offer easy answers.  In fact, solving these problems will cause a fair amount of pain and difficulty, which may harm our majority's future electoral prospects.

Balancing the Budget

The Bush administration and their Republican enablers have left a terrible fiscal situation.  Despite entering office with a surplus, the Bush administration has once again returned to the Reagan era policy of deficit spending.

From the Bureau of Labor Services:

Employment increased in October, and the unemployment rate declined to 4.4 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  Nonfarm payroll employment grew by 92,000 in October following gains of 148,000 in September and 230,000 in August (as revised).  In October, job growth continued in several service-providing industries, while employment declined in manufacturing and construction.  Average hourly earnings rose by 6 cents over the month.

So, how does this expansion compare to other expansions with the addition to today's number?  Bush still has the worst record of job creation of any expansion in the last 40 years.

The U.S. economy is ``on a knife's edge,'' and growth may slump to less than a 2 percent pace next year unless the Federal Reserve cuts interest rates, according to Merrill Lynch & Co. economists.

``Our recession-risk indicator is now at 51 percent odds for an actual economic downturn in the coming year,'' writes David A. Rosenberg, chief North American economist at Merrill Lynch in New York, in a note today. The last time the indicator registered that high was in the recession year 2001. product growth, adjusted for inflation, compared with Rosenberg's forecast of 2 percent growth in 2007 (the blue line). The 10-year trend in real GDP growth is shown in green.

Rosenberg has been fairly bearish for the better part of a year that I know of.  He was one of the first economists to point out the weak job growth of the Bush administration along with this economy's heavy reliance on housing.  The fact his model is calling for a recession indicates other Wall Street economists are probably starting to think the same thing in one capacity or another.  The Fed certainly is:

The odds of a recession in the United States in the next year are now greater than 50-50, according to a simplified version of a model developed by an economist at the Federal Reserve.

Over substantial Democratic opposition, Bush and a Republican-controlled Congress have cut taxes significantly over the past six years. The problem is that -- with plenty of cooperation from Democrats -- they have also greatly increased spending.

From fiscal 2001 to 2006, federal outlays shot up 42 percent, more than double the 19 percent increase over the previous five years.

In the short run, you can cut taxes and spend more. In the long run, as Nobel laureate economist Milton Friedman has potently argued, to spend is to tax.

In that vein, economist V.V. Chari of the University of Minnesota explained at a conference for journalists on Oct. 17, ``The true burden of government is what it spends today and in the future.'' When a politician brags, ``I cut your taxes,'' that's not what really matters, he said.

No matter how you describe it, Bush's tax cuts (90% of which went to the top 10% of income earners) are really tax deferrals.  The reason is simple: THE FISCALLY CONSERVATIVE REPUBLICAN MAJORITY SPENDS FAR WORSE THAN "TAX AND SPEND" LIBERALS.

Republican Representative Gil Gutknecht is talking up the strong economy in the closing days of a tight re-election campaign. The problem: Middle-class voters in his southern Minnesota district aren't inclined to celebrate upbeat economic statistics.

Gutknecht, a six-term House member, isn't alone. Republicans who planned to use low unemployment, cheaper gasoline and a surging stock market as a shield against discontent over the Iraq war and congressional scandals are discovering that there's little protection to be had.

From Bloomberg:

The U.S. economy grew at a 1.6 percent annual rate last quarter, the slowest pace in more than three years and less than economists forecast, as housing slumped and the trade deficit widened.

The first estimate of the quarter's gross domestic product, the value of all goods and services produced in the U.S., compares with a 2.6 percent gain from April through June, the Commerce Department reported today in Washington. A gauge of inflation watched by the Federal Reserve eased.

U.S. existing home sales slipped for a sixth straight month in September, a real estate group said on Wednesday, underscoring a weak spot in the economy that some analysts think could lead to lower interest rates next year.

Just hours before an announcement from the Federal Reserve that it was holding the federal funds rate steady, the National Association of Realtors said home resales slowed to an annual rate of 6.18 million from a 6.30 million pace in August.

The inventory of homes for sale fell 2.4 percent, or 93,000 units, to 3.75 million, its second consecutive drop, although the number of unsold homes on the market remained at a relatively high 7.3 months' supply.

Frist suggested that Republicans remind voters of subjects like tax cuts and lower gas prices, the result, he said, of the energy bill passed by Congress last year.

"These re all things the media has not covered," Frist said. "People don't say, 'This Congress passed tax cuts.' But that means something to every American."

Wow Bill - the tax cuts means something to EVERY American?  Frist isn't even close on that one.  

According to theTax Policy Institute:

The Republican's have been talking about the record levels for the Dow for the last week.  Their basically arguing this is the sign everything with the economy is great, therefore Bush's policies are working.  Of course - and as usual - they're not placing this in context. Once you place these records in context, the picture isn't as bright.

First - it's important to remember the Dow is comprised of 30 companies.  There are over 10,000 individual stocks on the various exchanges now.  Back when there were fewer stocks in the overall market (and before there was a NASDAQ) it made sense for the analysts to use the Dow as a general barometer of the market.  Now, it's less of a true indicator of the overall market.

The plight of the middle class has again come into focus recently.  On Wednesday, Lou Dobbs had a special on CNN called "The War on the Middle Class".  He also has a book on the stands now with the same title.  There was also a recent article - which I will discuss below - that deals with the issue.

The bottom line is simple: Republican policies have greatly harmed the middle class.  Below I will explain why.

First, the middle class was built on manufacturing and high-tech jobs.  This expansion has seen a net loss in both areas.

Manufacturing Employment:

One of my favorite things about this blog is the highly informed nature of everybody who adds comments.  There are very few one-sentence responses.  Instead, there are detailed, thought-provoking arguments for and against whatever is posted in the article.

Over the last few months there have been some wonderfully spirited debates about the economy - specifically, what will happen in the next 12-18 months.  I have officially gone on record as saying there will be a recession by the end of Q1 2007.  There are others who are arguing for a soft landing - meaning economic growth will slow but the economy will not contract.  Below I am going to briefly outline the central reason for my bearishness and what I think is the argument for a soft landing.  If you are in the soft landing camp, please let me know if I have missed something or misstated a point.

After looking at the facts, I think both arguments have merit.  This is the great joy of economics - you can't get a straight answer from any economist.  I also wanted to add that several people who have argued for the soft landing have made some extremely good points and made me seriously question my overall bearishness.

Robert Rubin was one of the architects of Clinton's economic program - an economic program that worked for the vast majority of Americans.  The economy created 23 million jobs.  Real incomes - incomes adjusted for inflation - increased as documented by the Census Bureau, Federal Reserve and Bureau of Labor Statistics.  Total US Treasury debt issuance slowed dramatically - especially when compared to the "you can have your cake and eat it to" supply - side economic crowd.  In other words, when Rubin talks, you just might want to listen.

There are three weeks left before the election.  Recent polling information indicates the Republican message is not working.  Therefore, I would expect some Republican candidates to change their message.  One of the most obvious new choices to talk about is the economy because the macro-level economic numbers are good.

However, there are two competing economic narratives about the current economy.  The Republican narrative focuses on reciting macro-numbers with little explanation.  For example, "The unemployment rate is 4.6%.  Therefore the economy is in great shape."  The Democrats use more on an emotional analysis, such as "what kind of job are you able to find?"  Both narratives are correct from their own perspectives.

One of the central problems with the current expansion is the high level of nuance it involves.  Referring to the example above the unemployment rate is low.  However, wages and median income have not meaningfully increased beyond inflation since hitting the economically important 5% unemployment rate in December 2005.  This indicates the jobs the economy is creating are not of similar or higher quality to the jobs lost.  But did you notice how long and complicated the preceding explanation was?  It's not great 30-second soundbite material.  

Take a look at this chart from From Calculated Risk.  It shows the percentage of income that goes to debt payments.  Once again, we're hitting records.

click on graph to enlarge

The household DSR (Debt Service ratio) set another record at 14.40%, up from 14.31% in Q1 '06.

The owner FOR (Financial Obligation Ratio) set a new record of 18.06%, up from 17.96% in Q1 '06.

The mortgage portion of the FOR set a new record at 11.60%, up from 11.47% in Q1 '06.