1999 Or 2008 All Over Again?

Via Pension Pulse.

On Sunday morning, I watched an interview on CNN's State of the Union with Candy Crowley (see video below or click here
to watch it). The interview was on the US economy and the guests
were two two former directors of the Congressional Budget Office,
Alice Rivlin who's now a Brooking's expert, and Doug Holz-Eakin, president of DHE Consulting, LLC.

Not
surprisingly, both Ms. Rivlin and Mr. Holz-Eakin were talking about
cutting spending, especially entitlement spending, but they also
addressed the impact that the crisis in Japan and the Middle East unrest
are having on the global economy. At one point, Candy Cowley asked
about the recovery in the US economy. Here is part of the exchange taken
from the show's transcript (added emphasis is mine):

CROWLEY: Alice Rivlin and Douglas Holtz-Eakin, thank you both so much for joining me.

You know, every time we watch the stock market, the analysts say,
well you know, the oil did this and, therefore, the stock market's done
that. What is the net effect of what's going on in the world -- I
know the markets don't like things that aren't settled, but what about
just every day living, you know, in America, looking for a recovery
that is still sluggish?

Japan, has that affected the recovery at all? And how about Libya and the Middle East in general on oil?

RIVLIN: Well, nothing is going on is good -- Japan, Libya,
whatever, the high price of oil and gasoline, all of these create
uncertainty and to some extent a drag on the economy, especially the
price of gasoline and oil.

But none of it is major yet. Your
intro emphasized all the things that might be bad, but the good news
is the economy is perking along, not fast enough, very weak hiring,
very weak in housing, but the rest of the economy does seem to be
coming back slowly but steadily.

CROWLEY: But what -- can
you really have a recovery with -- in a housing market, we keep saying
the housing market hit bottom. Oh, the housing market has hit bottom.
So now we've gone to the lowest ever in new home sales which are the
most important, because they provide jobs in building, et cetera. Can you really have a recovery without a recovery in the housing market?

HOLTZ-EAKIN: There are two pieces to the housing recovery. The first is construction of new homes. And there we've seen the housing market go from just a really drag on the economy to about neutral.
It's not adding or subjecting from growth at this point. The
second piece is the value of homes, which affects deeply how families
feel about their futures and their ability to spend. And there I think we're about to see the worst end. But until both of those start moving north, we're not going to see a really robust recovery.

CROWLEY: Because it undermines consumer confidence, right?

HOLTZ-EAKIN: Absolutely.

CROWLEY: And what about hiring and gas prices? Isn't there some
connection there? If I'm a business and suddenly my energy costs have
come up whether it's a business that involves trucks or a business that
involves heating or air conditioning in the summer, doesn't -- isn't
that a drag on hiring people?

RIVLIN: Yes. For some
businesses, it is. The main effect is that consumers who have to buy
gasoline will spend less on other things. So it's a drag from that
sense. And for some energy intensive businesses as well.

But we don't have as many of those as we used to. We're not as dependent as an economy on energy.

HOLTZ-EAKIN: I think there are three lessons on the oil and gas
front. Lesson number one is we have oil at $140 a barrel in 2008. And
it went down not because we somehow discovered a lot more oil. No,
it went down because we went into a massive global recession. As
economies recovered, it was inevitable that prices were going to rise.
And this was utterly foreseeable.

Second piece is that
Libya's not really the concern. That's not what markets are pricing.
It's the broader Middle East. Libya is 2% of oil supplies. That's
not our problem. It's what happens in the rest of the Middle East.

And the third is, something like this is always going to happen.
There is always some piece of bad news out there. So, the key should
be to build an economy that's growing more robustly, it's more
resilient to bad news that inevitably will happen. And there we could
do better.

We've seen calls for more pro-growth strategies
this week from Eric Cantor, for example, and it really is time to get a
strategy that is about having the economy grow faster.

CROWLEY: And so what I take from you is, yeah, around the margins this
isn't great for the economy. However, when you look at the current
state of the economy, the sluggishness of recovery, what worries you
most?

RIVLIN: What worries me most, and I suspect Doug as well, is our looming debt crisis. We've got to get past this squabbling over the federal budget for this fiscal year. That's just a squabble. But
what is really important is that we're moving into a period when we
will have debt rising rapidly because of the retirement of the baby
boom generation and high medical care costs. And we've got to do
something about that. It's got to be bipartisan, and we've got to do it soon so that we reassure our world creditors that we're on the job.

CROWLEY: Doug, can you just -- I think people know intrinsically
the debt is a bad idea, and when they hear trillions and trillions,
it's an even worse idea. But can you connect debt to my life, to the
life of the viewers?

HOLTZ-EAKIN: Sure. If we continue down the path we're going down, in the good-news scenario, what we see is interest rates start creeping up and then elevate sharply.

That
means that, if you want to buy a car; if you want to buy a house; if
you want to send your son or daughter to college, it's a very expensive
proposition.

It also means that the place you work
can't invest in the upgrades it wants to and it really can't start
giving you raises because they're carrying costs of their debt. So you
see an economy that starts to stagnate, where you don't increases in
the standard of living, and everyone suffers from that. And it goes on
for a long period of time. That's the good news scenario.

The
bad-news scenario is we see 2008 all over again, where credit freezes
up and we get a sharp recession. Neither is something we should mess
with.

CROWLEY: I was going to ask you, I mean, can
you -- if the crisis remains a crisis and Congress can't get its act
together nor do something about it, which I'm assuming is for you all
cutting spending, perhaps raising taxes, some -- you know, combination
thereof, could we have a worse recession than we have just experienced?

RIVLIN: Yes, we could definitely have what's called a sovereign
debt crisis. We used to think that only happened to small countries on
other continents, but it could happen to us as well.

That means we would not be perceived as able to get our act together and pay our debts. And our creditors would lose confidence in us. And when that happens, things go south very fast.
We could have a big spike in interest rates, a big fall in the dollar
and be plunged into a worse recession than the one we're climbing so
slowly out of right now.

Let me comment on this
exchange. First, as I stated above, given their background and
ideological views, it hardly surprises me that Ms. Rivlin and Mr.
Holz-Eakin are sounding the alarm on US debt and entitlement spending.
But to claim the US might suffer a sovereign debt crisis is simply
ridiculous. The US is the largest economy in the world by far, it prints
the world's reserve currency and the risk of a US sovereign debt crisis
lies somewhere between zero and zero. All the doomsayers will tell you
otherwise but that's a fact.

As far as entitlement spending "run
amok," we need some perspective. These aren't pension liabilities of
state plans where it's difficult to cut benefits, they're entitlement
programs that are based on current spending and are subject to political
decisions. If they need to be cut or reformed, and if there is
political will to do it, US Congress will take action.

Ms. Rivlin
also dismissed rising energy prices, stating that "we're not as
dependent as an economy on energy." That may be true but oil prices
still matter. Rising gas prices are going to hammer consumer confidence and
are ultimately deflationary, not inflationary for the economy,
something that analysts keep omitting.

That brings me to Mr.
Holz-Eakin's comments on housing, interest rates and another sovereign
debt crisis. On housing, Mr. Holz-Eakin sounds more sanguine than
others, stating that new homes construction is no longer a drag on the
economy and that the he sees an end to the drop in home values. But
others aren't convinced that housing is stabilizing. Diana Olick of CNBC
recently wrote a comment on why housing is going through a double dip, citing these reasons:

1. Supply supply supply. Too much. Can't overstate that.
2. Foreclosures.
   Banks are pushing properties through the foreclosure process at a
   really rapid pace now. I'm also hearing they may be ramping up sales
   ahead of any settlement with nation's attorney's general over the
   so-called "robo-signing" paperwork scandal. More foreclosures on the market means more supply and more price pressure.
3. Gas prices: See yesterday's blog post. It's real.
4. Mortgage applications. They are way below historical norms. All cash buyers in February rose to a record 33 percent of all buyers of existing homes. Many many Americans simply can't qualify for a mortgage anymore at a reasonable rate.
5. FHA: Next month the cost of an FHA loan goes up yet again. FHA loan volume dropped 26 percent in February month to month.
6. Consumer sentiment: Awful. No confidence in this market. Only the investors are out in droves, looking for and getting bargains. We need them, but we need real buyers as well.

Mr.
Holz-Eakin also noted that they see "interest rates start creeping up
and then elevate sharply". If that happens, it will kill any recovery
in the housing market. But I just don't see rates rising sharply for two
reasons. First, the Fed's policy remains reflate and inflate at all
costs to avoid a prolonged period of debt deflation. They will continue
with quantitative easing (QE) which will cap long-term bond yields.
Second, without a robust housing and more importantly jobs recovery, the
risks of deflation remain elevated. I simply cannot understand all
these doomsayers who see hyperinflation on the horizon. Why? Because oil
prices are rising again? Again, if they rise too high, too fast, it's
ultimately deflationary for the US and global economy.

Mr.
Holz-Eakin also stated that he sees "2008 all over again, where credit
freezes up and we get a sharp recession." But to see 2008 all over
again, you need a catalyst, perhaps a major sovereign debt crisis. The
doomsayers will tell you look no further than Greece and the Eurozone,
but as I wrote in my last comment, I'm not buying the drama.
There are serious structural problems in the Eurozone, but to claim
that a major European default is a "done deal" is way too easy.
Importantly, when everyone is on the same side of the trade, shorting
the sovereign debt of European periphery economies, then I start
questioning the merits of that trade.

It's also worth keeping in mind all the macro events that rocked markets
over the last year or so, starting with Dubai, Greece, PIIGS, and more
recently Japan. In every case, markets were able to climb the wall of
worry and head higher. This doesn't mean that it will continue or that
some serious sovereign default or geopolitical crisis can't rock the
global financial system again, but it speaks volumes to the amount of
liquidity out there ready to soak up any major macro event.

This brings me to my final point on another bubble forming in the stock market. Earlier this week, Dave Kansas of the WSJ reported that Red Hat Jumps Higher After Strong Earnings:

The remarkable return of hot 1990s-era hot stocks continues (think JDS Uniphase, Ciena, Micron et al) this morning with Red Hat.

The
open-source software company is surging more than 13% out of the gates
following strong fourth-quarter earnings after-the-close yesterday
afternoon.

Oppenheimer (Outperform rating): “While we were
pleased to see the company deliver strong results across the board, we
were particularly impressed with RHT’s ability to deliver over 30%
billings growth and over 20% growth in cash flow from operations ($95.0
million).” Oppenheimer says, and backs an outperform rating.

Robert Baird raised Red Hat to outperform from neutral.

As Matt reported earlier, Micron is jumping more than 6% after reporting its own earnings.

Among other highfliers, JDSU and Ciena are up about 2%. Maybe it is the 1990s again.

Semis,
networking stocks and materials have been on fire following the
earthquake disaster in Japan. Earnings have been strong but there is a
lot of hot money flowing into these sectors too, making them very
volatile. It all looks and feels like the reemergence of the tech
bubble, a point covered by Jameson Berkow of the Financial Post, Bootup: Experts warn of Internet bubble 2.0:

Today
in technology: With a number of new web firms expected to make public
stock offerings this year, observers are growing concerned the market
could be headed towards another bubble; Canada’s first offshore wind
farm project wins a key victory in the regulatory process; the inner
workings of the computer hacker group known as Anonymous are exposed
and Research in Motion Ltd. along with several other Waterloo,
Ontario-based tech giants are looking to recruit more Canadian talent.

Is Silicon Valley ‘on tilt’ again?
Noted financial commentator Paul Kedrosky
used a poker metaphor on Friday evening to explain why the Internet
industry is about to do the same thing it did back in the spring of
2000, when the first dot-com bubble burst and an estimated US$6-trillion in shareholder value vanished. He offers a Top 10 list
of reasons why that could soon happen again, among them being the
extreme popularity of conferences such as South by Southwest (SXSW), or
the fact that private valuations are approaching public valuations
(i.e. privately-held Facebook has reached valuations as high as
US$65-billion).

Steve Blank, a professor at Stanford University’s
engineering school and at UC Berkeley’s Haas School of Business, has
gone so far as to publish New Rules for the New Bubble.
Unlike the last Internet bubble, writes Mr. Blank, the next one will
involve “real” companies with real revenue and masses of real customers.
Facebook, LinkedIn, Skype and Groupon are all examples of firms
expected to launch IPOs in the next year or two, and all have displayed
an ability to earn money and maintain a strong customer base. “But like
all bubbles, these initial IPOs will attract companies with less
stellar financials, the quality IPO pipeline will diminish rapidly, and
the bubble will pop,” Mr. Blank cautions.

I
would also caution people to avoid chasing stocks that run up too high,
too fast. There is a lot of liquidity spurred by hot money, hedge funds
and banks engaging in high-frequency trading, mutual fund flows, pension flows,
sovereign wealth fund flows, and last but not least, retail investor
flows (they're always the last ones to the party and typically get
slaughtered). Tread carefully, these markets may appear easy but if you
become complacent and ignore risks, you'll get killed.

I will however tell you that I feel like we're heading towards another
1999 rather than another 2008. Call it a gut feeling but I look at the
stock market every single day, tracking unusual volume and which stocks
and sectors are making new highs. I also study the quarterly holdings of
top hedge funds and mutual funds. Right now, I see the "Risk On" trade.
Will it last? Will it be in tech or so will it be in some new bubble
like renewable energy? Who knows? All I know is that the liquidity party
will continue on Wall Street for the foreseeable future, which is why I
continue to advise people to keep buying the dips.

Comments

[BeerGoggles]

BTFD, don't listen to ZH.

You know that when ZH say this "which is why I continue to advise people to keep buying the dips." is is time to short the fucking market (STFM, STFR)

ZH advice on the SNP has been consistently incorrect.

[gorillaonyourback]

your a dumb fuck, most people here realize its QE 2infinity, and we take action accordingly.  Again your a dumb fuck.

[Sudden Debt]

A moron that doesn't realize that the more debt the governments make, the worse it gets to get a fix.

I bet it's the same kind of moron that thinks you can downpay a credit card bill by applying for another and using that one to cover the interest payments.

[Popo]

Is that Gollum, sitting on the left?

[BigJim]

the risk of a US sovereign debt crisis lies somewhere between zero and zero

Dear oh dear oh dear. And later, in the very same article, you write:

In every case, markets were able to climb the wall of worry and head higher. This doesn't mean that it will continue or that some serious sovereign default or geopolitical crisis can't rock the global financial system again, but it speaks volumes to the amount of liquidity out there ready to soak up any major macro event.

Do you think it's possible all that liquidity might have something to do with the ever-increasing likelihood of a US sovereign debt crisis, Leo?

[masterinchancery]

Apparently you don't realize that Rivlin has always been a money printer who never sees a bubble. And apparently you don't realize that printing enough money to pay the debt that exists or will soon exist is BY ITSELF a sovereign default.  Not to mention 100 trillion + in entitlement debt that continues to expand.  I assume you never read Ken Rogoff's book on 800 years of financial folly-"this time it will be different", all of which we are repeating.

[nmewn]

"Do you think it's possible all that liquidity might have something to do with the ever-increasing likelihood of a US sovereign debt crisis, Leo?"

At some point, I envision a Leo post extolling the virtues of any government not even being obligated to keep a ledger of revenues & expenditures as it's become completely meaningless to keep one...but don't expect a follow on post to lay off government book keepers or a decrease in taxation ;-)

[equity_momo]

Ive been reading this website since before it moved servers and i dont recall ever being advised to short the market. If you get that impression due to its pessimistic , nay , realistic view of markets , then so beit. However , my impression lately has been that ZH foresee infinite QE and are guarded  against being short assets in nominal terms. 

[traderjoe]

The trolls always talk about how ZH is bearish on stocks. No. Stat arbs. Long EU CD's at the low. Long physical PM's. Silver kicked ass last year. And to AVOID the corrupt markets. Not long or short.

Not an investment recommendation site, but the bears here aren't doing so shabby, Thank you very much.

[Imminent Crucible]

Leo Pensionopolous assumes that ZeroHedgers are bears and short the markets simply because we are negative on the moral environment surrounding the capital markets and the money-center banks that game them, and the politicians who suck up to the megabanksters.

Leo apparently thinks that the U.S. can't suffer a financial or currency crisis because the dollar is the world's reserve currency.  I guess 2008 didn't happen, and the money-center banks didn't collapse and have to be rescued with Fed credit. The Fed didn't fix the banks, Leo. They're still not lending.  They're still capital-impaired. They're still holding most of their worthless toxic paper OBS and praying that house prices will stop falling and people will start paying their mortgages again and once again believe in unicorns that crap miraculous Equity From Nowhere.

Put simply, Leo, we doubt that a bogus economy ginned up with borrowed "stimulus" money and bogus markets afloat on POMO liquidity can serve as the basis for a lasting prosperity. Put even more simply, the U.S. is broke and digging itself deeper every minute.  Yeah, the Fed can keep printing up more vapor-bucks and keep buying worthless promises from the Treasury so that it looks like the U.S. can still finance its deficits.

But the fact is that the Fed is adding the entire deficit to its balance sheet, and every measure of money stock is going off the charts. Oil isn't going up because of Libya. It was soaring long before the Tunisian street vendor set himself on fire. Oil, gold, cotton, wheat and all commodities are soaring because of this:

Base money:

http://research.stlouisfed.org/fred2/series/BASENS

M2 money stock:

http://research.stlouisfed.org/fred2/series/M2

Currency + demand deposits

http://research.stlouisfed.org/fred2/series/CURRDD

M1 money stock:

http://research.stlouisfed.org/fred2/series/WM1NS

BTW, Leo, I've got one trade going. I'm long physical silver since $4.25 per ounce.

That's it, honeybun.

[akak]

Nice!

Well done IC.

But it doesn't take much effort to bitch-slap Leo --- he keeps holding out his cheeks and asking for more.

[Imminent Crucible]

"holding out his cheeks"

For a second there, I pictured the wrong cheeks.  Gross.