Encouragement and Causation

The Lehmann Letter  (SM) This letter’s discussion of the 2003 – 2008 real-estate bubble and bust generated reader comment. Some of these comments said that the federal government had been the root cause of the problem. Readers know that this letter disputes that assessment. The Federal Reserve’s 2001 – 2007 low-interest-rate policy was culpable, but the Fed is not the federal government. These low rates encouraged the financial industry’s creation of mortgage-backed securities. Many firms, such as Bear Stearns and Lehman Brothers, were eventually dragged down because they invested in these instruments. The mortgage-backed securities were less than gilt edged Continue reading

No Industrial Surge

The Lehmann Letter  (SM) At the beginning of the month The Institute for Supply Management reported a jump in its Purchasing Managers’ Index. That raised hopes for an industrial upsurge. But those hopes may have been premature. This morning the Federal Reserve reported no gain in capacity utilization: http://www.federalreserve.gov/releases/g17/Current/default.htm At 77.6% capacity utilization continues to lag below 80%. The chart shows that 80% is a serious threshold. Capacity Utilization (Recessions shaded) Capacity utilization is also called the industry-operating-rate. It measures industrial output (mining, manufacturing and public utilities) as a percentage of the maximum. The chart shows that industry bounced back Continue reading

Earnings Challenge

The Lehmann Letter (SM) Here’s another reference to an article that raises questions for the stock market’s outlook. See this morning’s Wall Street Journal piece by Alexandra Scaggs: “After Losing Season, Records May Be Safe” http://online.wsj.com/article/SB10001424127887323446404579011190730677498.html?mod=ITP_moneyandinvesting_2 Here’s how it starts: “U.S. stocks are facing a formidable obstacle on the road to further records: slowing profit growth. “With 90% of companies in the S&P 500 having reported second-quarter results, firms are on track to post 2.2% earnings growth from the year-ago quarter. That is the second-lowest growth rate since the depths of the financial crisis, and down from previous periods. Earnings Continue reading

Housing and the Federal Government

The Lehmann Letter (SM) Readers have commented on the federal government’s role in the real-estate bubble and bust. Many blame the federal government for encouraging homeownership to the point of recklessness. That, they say, inflated the bubble. Most observers, however, see private finance as culpable. They say that private lenders threw money at borrowers who clearly would have difficulty repaying. This letter believes it is time to review the Federal Reserve’s role in the debacle. Keep in mind that the Fed is not an agency of the federal government. It is a quasi-public corporation, owned by the nation’s banks with Continue reading

Housing: What Role Should Government Play?

The Lehmann Letter  (SM) Did you see Gretchen Morgenson’s article in Sunday’s New York Times? Soon after the housing bubble burst in 2008, an argument broke out between those who blamed the private sector and those who blamed the federal government for the debacle. Those who blamed the federal government pointed to government efforts to ease affordability and Fannie Mae and Freddie Mac’s role in financing mortgages. Most studies and authorities, however, have not accepted those arguments and have found culpability in private-sector lending. Nonetheless pressure remains to remove the federal government from the housing sector. That makes Ms. Mortenson’s Continue reading

Stocks: P/E Too High

The Lehmann Letter  (SM) This letter has warned that corporate earnings have stalled and that the rising stockmarket has pushed the P/E ratio too high. The conclusion: Stocks are overvalued. See this morning’s Wall Street Journal for a confirmation: “Stocks Start to Look Overvalued” http://online.wsj.com/article/SB10001424127887323838204579000930556704354.html It begins: “For the past several years, stock-market bulls have been able to argue that stocks are cheap. That argument is increasingly on shaky ground. “In recent weeks, the S&P 500 index has pushed further into record territory. But those gains have come as profit growth has stalled. “As a result, stocks in the S&P Continue reading

Housing: The Government’s Role

The Lehmann Letter  (SM) Most observers of the Great Recession in general and the housing crisis in particular don’t blame the federal government for either. Nonetheless there have been repeated calls to reduce the federal government’s role in the housing market. President Obama and Congress say that is their objective. That consensus may generate new legislation. An analysis by Binyamin Appelbaum in yesterday’s New York Times summarized the situation well: “Washington Steps Warily on Housing http://www.nytimes.com/2013/08/07/business/washington-edges-warily-into-housing.html?ref=binyaminappelbaum&_r=0 The article began: “In the seven years since the housing market started to fall apart, politicians of both parties have promised repeatedly to build a Continue reading

China and the Business Cycle

The Lehmann Letter  (SM) An article by Tom Orlik in yesterday’s Wall Street Journal discussed consumer spending and the difficulties that confront China’s economic managers: “Murky Data Muddy Debate on Chinese Consumers’ Strength” http://online.wsj.com/article/SB10001424127887323997004578641861183467412.html But the business cycle remains China’s biggest risk. China has a capitalist economy and no capitalist economy has been able to escape the vicissitudes of the business cycle. Yet China has done well so far: Thirty years of booming growth without a major downturn. China’s policymakers have successfully employed expansionary monetary and fiscal policies whenever a slump threatened. Consequently low interest rates and surging government spending Continue reading

Employment Still the Best Economic Indicator

The Lehmann Letter  (SM) How is the economy doing? This letter has observed that the economy is bifurcated. Some indicators, such as the stock market, are at record levels. Other indicators, such as homebuilding, have not fully recovered. But employment remains the best barometer because it provides the broadest measure of overall welfare. When the unemployment rate falls to 5% our nation will once again enjoy broad-based prosperity. This is not a secret. The Federal Reserve publicly tracks the unemployment rate in order to explain its policies. Last Friday’s announcement that the unemployment rate fell a little and that job-growth Continue reading

China’s Balance Sheets

The Lehmann Letter (SM) Observers have expressed concern lately regarding China’s booming economy. Is a bubble building? Are Chinese balance sheets becoming too illiquid and too debt-heavy? If so, that could presage a severe recession. This concern is founded upon the events leading to the Great Recession. Our real-estate bubble popped, and the consequences were dire. On July 19 Floyd Norris wrote an article for The New York Times criticizing our central bank’s performance: “The Time Bernanke Got It Wrong” http://www.nytimes.com/2013/07/19/business/economy/when-bernanke-got-it-wrong.html?ref=highandlowfinance&_r=0 Mr. Norris said: “It is amazing that a lot of criticism of the Federal Reserve today focuses on what Continue reading