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Q&A With The Hatzius Who Stole The Hopium: Economic Outlooks Summarized As "Bad" Or"Very Bad"
Jan Hatzius is on a roll these past two days: after first debunking any myths that QE2 will be less than $1.5 trillion in total, thereby confirming the dollar's days as a reserve currency are numbered, now he is out to prove to Obama and his incoming chief economic advisor whichever Mark Zandi that may be, that there is no Santa Claus. To wit: "We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession. There is not much probability of a significantly better outcome. The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish." That pretty much sums up why stocks will continue being completely irrelevant as an indicator of reality for about a year longer.
From Goldman Sachs: More Q&A on the Outlook
Today’s comment extends yesterday’s discussion of monetary policy to the overall economic as well as fiscal outlook. A number of the questions surfaced in a panel discussion at the conference on “America’s Fiscal Choices” in Washington today.
Yesterday’s daily comment considered the monetary policy outlook in Q&A form. Today’s comment applies the same format to other questions about the economic and fiscal outlook that we have encountered recently. A number of these surfaced in a panel discussion at the “America’s Fiscal Choices” conference organized by the Economic Policy Institute, Demos, the Center for Budget and Policy Priorities, and the Century Foundation in Washington on Tuesday (http://demos.org/event_list.cfm?currenteventid=73D0AB98%2D3FF4%2D6C82%2D539AAAAE55A8D617).
Q: What is the short-term outlook for the economy?
A: We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession. There is not much probability of a significantly better outcome. The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish. (See “The Risk of Recession: Concentrated over the Next 6-9 Months,” US Daily Comment, September 23, 2010.)
Between the two scenarios, the fairly bad one—slow growth, rising unemployment, but no outright recession—has significantly higher probability, for three reasons.
First, activity in the cyclical sectors of the economy (which typically account for most or all of the overall decline in GDP during a recession) remains at very low levels. As of the second quarter, the sum of consumers’ durable goods spending, business fixed investment, and inventory investment—the most cyclical parts of GDP—stands at just 20.0%, above the postwar low of 18.1% seen in early 2009 but still far below the historical average of 24.8% and below any pre-2008 point in postwar history. In some of these areas, it is almost mathematically impossible to see another big drop (homebuilding is the best example).
Second, excess supply of houses and capital goods is gradually being worked off via these low levels of activity. As the excess supply declines, the appropriate flow of production will increase gradually, although it will probably take several years before both are back to normal.
Third, monetary policy is gearing up for another dose of stimulus, most likely starting at the November 2-3 FOMC meeting, as we discussed in yesterday’s daily comment. The expectation of this move has already led to a broad easing in financial conditions via lower interest rates, higher stock prices, and a weaker dollar.
However, the recession scenario also has significant probability (we still think about 25%-30%). First, it is still possible that we will see a full expiration of all of the 2001-2003 and 2009 tax cuts if Congress fails to agree on a bipartisan “deal.” Relative to our baseline scenario of extension of the lower- and middle-income tax cuts, we estimate that full expiration would result in a further hit to GDP growth in early 2011 of nearly 2 percentage points (annualized).
Second, house prices over the next year could fall by more than our baseline forecast of about 3%. If we saw, for example, a 10%-15% decline, the risk of recession would rise significantly. The uncertainty about the future path for house prices is particularly large at present because two of the best predictors of house prices are pointing in opposite directions. On the one hand, valuation and affordability are decent, even if we adjust for the still-tight level of lending standards. On the other hand, excess supply remains at very high levels (although it is declining slowly). It is difficult to be certain which of these two factors is more important, and the answer makes a big difference to the house price outlook. However, in 6-9 months we are likely to have a much better idea of whether the current relapse in house prices is just “bumping along the bottom” (our baseline expectation) or a more serious renewed decline.
Third, the current gradual labor market deterioration might turn into more rapid deterioration if the economy proves unable to sustain “stall speed”. In the postwar US economy, we have never seen an increase in the unemployment rate (on a three-month moving average basis) of more than one-third of one percentage point that did not coincide with or foreshadow a recession. There are some decent reasons to believe that this pattern may not apply under current circumstances—particularly the fact that the level of activity is already so depressed following the Great Recession—but the consistency of the pattern is so striking that it should be viewed as a serious warning sign given our forecast that joblessness will rise back too 10% by early 2011.
Q: What about the longer-term outlook, i.e. beyond mid-2011?
A: The answer depends on whether we are talking about the level of economic activity or the rate of change. The levels of output and employment are likely to remain depressed relative to potential for many years. This means that there will be many people who are out of work but would be working in an economy with an adequate level of demand. It also means that we should worry about the possibility that a greater share of the—currently mainly cyclical—unemployment turns structural in coming years. And it finally means that the risks will remain on the side of deflation, or at least undesirably low inflation for a long time to come.
However, the rates of change of GDP and employment are likely to improve as we move past early/mid-2011 and into 2012, provided the economy doesn’t return to recession in the near term. Beyond early 2011, the impulse of short-cycle factors such as inventories and fiscal policy to GDP growth is no longer likely to deteriorate (i.e. it will not get worse in a second-derivative sense, although it will likely remain negative). Meanwhile, the slow-motion improvement in areas such as excess housing supply and bank credit quality is likely to continue. This should add up to a gradual acceleration in growth to a trend or slightly above-trend pace by late 2011 and going into 2012.
Q: What should policymakers do about it?
A: On the monetary side, we believe that substantial further stimulus is needed. It does appear that Fed officials are moving in that direction. The latest policymaker to add his voice to the chorus was Chicago Fed President Charles Evans today. In an interview with the Wall Street Journal, Evans made the following comments, which are notably aggressive for an official who has generally been viewed as a centrist: “I knew it was going to be bad. And it is not improving. We’re pushing out the growth prospects. I just think it calls for much more than we’ve put in place. My view on accommodation at the moment is not data dependent. I think we’re there.”
On the fiscal side—the main theme of today’s conference—the prospects are in any case bleaker. Under our baseline assumption that most of the tax cuts are extended but emergency unemployment benefits expire in November, we will see fiscal restraint of about 1¾ percentage points in 2011. Even under the most optimistic assumptions from the perspective of the overall stance of policy—full extension of all tax cuts as well as another extension of the emergency unemployment benefits which are currently slated to expire in two months—we are still likely to see fiscal restraint of around 1 percentage point (mainly because of weakness on the state and local side). And under the most pessimistic assumption—i.e. that all tax cuts and benefit programs expire as scheduled over the next few months—the restraint rises to about 3 percentage points in early 2011.
Q: Are policymakers at least moving in the right direction?
A: Fortunately yes, although the progress is slow when measured against the scale of the challenges. On the monetary side, we have been encouraged by comments such as those of Presidents Evans and Dudley which not only recognize the need for additional asset purchases but are also willing to explore more aggressive options such as price level targeting. And on the fiscal side, the likelihood of a full expiration of all of the tax cuts does seem to have declined somewhat further. While the overall policy stance will still be far from what is needed, at least the debate is moving in the right direction.
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how can more "stimulus" - translation - $ to obama donors solve anything.
they can pump the spx to 1500 and gold to 3000 - it wont create jobs or heal RE or fix the deficits
healing and fixing is not their intention.......
it's all about "the fundamental transformation of America"
healing and fixing is not their intention.......
it's all about "the fundamental transformation of America"
How do you tell a communist publisher? They work for overlords of the Federal Reserve.
How do you tell a communist dupe? They keep trading in the false labels established to loot middle class wealth and steal constitutional liberties.
actually, this whole system of central (fiat) money planning and fractional reserve lending is predicated on a scenario where rates can go lower in order to make (borrowing) investment cheaper, OR raising rates to purge the system of excessive risk-taking and waste in order to protect faith in the brand-name fiat.
'Deficit spending' (coupled with tax cuts), however, only worked for Reagan because rates were coming down simultaneously whilst government faced the prospects of having to tighten its belt moving forward due to a 'smaller allowance'. In essence, the private sector loved it.
these days rates have absolutely nowhere to go (but up!), and further deficit spending (stimulus) destroys both the brand-name of the USD (default risk) and the belief that government is getting smaller (in fact, it is growing in 'works programs'). in essence, the market hates it.
Hatzius Bitchez! Nothing is solved except to enrich the insiders. We are so F@cked.
Recession? He wishes we might get a stinkin' recession. We have a perfectly good depression baked in, greased with Orwellian lies and currency events sprinkled on top.
Just posted this on MS/gold article:
Taleb (Black Swan) said at a mutual funds conference in Manama, Bahrain today. “Dubai has been borrowing to put buildings on postcards. It can stop that, but America needs to borrow just to open the doors in the morning. That’s why I’m not comfortable with the United States.” www.gulfbase.com/site/interface/NewsArchiveDetails.aspx?n=153116
I'm curious who the attendees were at that conference.
mmmm, sounds delicious.
Add a Hindenburger with a side of Death-Spiral fries -- Bon Appetit!
And this is exactly why we will see stocks trade in a range between 1050 and 1175 for the foreseeable future. Sluggish = range bound stocks. Nothing explosive in either direction. Just a range with few retail participants.
No dice.
"Let the equity bear market resume" - Albert Edwards
http://ftalphaville.ft.com/blog/2010/10/04/359551/let-the-equity-bear-ma...
www.tinyhedge.blogspot.com
But Hatzius does not appear to contemplate possible exogenous shocks:
1) The rest of the world gets tired of being flooded with greenbacks as the Fed's cheap money is used to buy foreign high return assets. The US gets to destabilize the world economy due to its status as a reserve currency; The Japanese, Brazilians, Chinese, and Euros may get tired of playing this game and change the rules.
2a) Peace breaks out in Afghanistan as Karzi and the Taliban come to an accomodation.
2b) Karzi joins the Taliban and the conflict increases.
3) Israel decides STUXNET is no replacement for dropping iron.
4) The US financial system freezes up due to problems with MBS securities. This is the 1,000 pound black Pterodactyl that trumps the black white and grey swans.
Any of these take place and you will not believe the ensuing melt-up!!
"On the one hand, valuation and affordability are decent, even if we adjust for the still-tight level of lending standards. On the other hand, excess supply remains at very high levels (although it is declining slowly). It is difficult to be certain which of these two factors is more important"
answer
people without jobs and destroyed credit dont buy houses.
prices are still too inflated and the foreclosure mess is slowing the purge
Housing doesn't matter. Over at CNBC.com Cramer says so. "Housing Can't Hurt Us Anymore".
"“I am urging people to recognize that housing is not that important to this economy,” Cramer said during Tuesday’s Stop Trading!.
Aside of stating his relatively positive outlook on home pricing in general, one that largely contradicts the general consensus right now, Cramer predicted the sector would drop to as low as 5% to 6% of the US economy from its present level of 10%.
“It can’t hurt us anymore,” the “Mad Money” host said, adding that the services sector is much more important now.
Like I said earlier, you get one decent ISM services report and screw the mortgage mess or anything to do with housing - Cramer says it won't hurt us any longer. Way to go!
Q: What is the short-term outlook for the economy?
Bad.
Q: What about the longer-term outlook, i.e. beyond mid-2011?
Animal Farm.
Q: What should policymakers do about it?
Kill themselves. But not before rescinding every Federal law and burning all remnants.
Q: Are policymakers at least moving in the right direction?
No.
WTF is he talking about? Am I missing something?
Stocks are fake because the only real thing buying equities anymore is Fed POMO $$ via proxies. When it ends or is pulled away it collapses, it's a hologram.
Kind of scary when Goldman is the one speaking the truth about where we are and where we are going. These are the guys, after all, who would have disappeared in a cloud of self-immolation smoke in the fall of 2008 but for the herculean efforts of Hank Paulson, whose first allegiance was not to the US of A but rather his alma mater. Thanks for the look forward, Jan, now tell your bosses to pay off the FDIC guaranteed debt, refund the AIG money and then go F#$% yourselves.
I should probably get over all that stuff, huh? I mean, it's been 2 whole years since Goldman took us taxpayers to the cleaners, right?
nah, they been takin' peeps to tha cleaners for longer than 2 years.
this must be a paid-for posting 'cause i doubt zh would publish this drivel for free.
A criminal investigation of Goldman Sachs, the ringleader, the belly of the beast, would a great place to begin the RICO criminal investigations of the greatest financial crimes in U.S. history. Is there one prosecutor with the balls to bring Goldman Sachs to justice?
News for the ignorant populist Dolts: Goldman paid the Treasury a fee for the stamp "guarantee". The fee was compensation for the risk taken on by Treasury via the guarantee. This is how insurance works. If the ignorant dolts will recall, this "treasury guaranteed" debt program was Treasury's idea, in order to restart a debt market that was closed to financial institutions. Goldman Sachs was selected, by Treasury, to be the first because Goldman Sachs was the strongest institution. It would make no sense to attempt a restart with a weak institution.
So, Treasury asked Goldman to participate in order to help restart markets. Similarly, Goldman (and JPM) were forced to take TARP, against their judgement, as the Fed and Treasury needed to obfuscate from markets insight into which banks were at risk of failure, from those that were not.
I do recognize that facts and truth are frowned upon at Zero Hedge, so please ignore this post and continue on with your ignorant populist moronic drivel...
and i guess goldie was forced to take that $13.9 billion from aig.
If you are wealthy, and your house burns down, are you not going to take the insurance money because you do not need it?
Chemba, your rants about "populist" movements against Goldman Sachs, specifically, are justified in many ways. clearly, GS consists of 'talented' individuals "just doing their job" and, in many cases, doing it very well. In a world of central money planning, GS has successfully understood and exploited the dynamics. Further, investment banking is a valuable service, as without it there would be no publicly traded companies and capital would not flow as freely to where it can be best 'put to work'. Goldman Sachs, in particular, has been an exceptional investment bank relative to others, and certainly a 'crown jewel' to NYC's crown, relatively speaking, that is.
HOWEVER, for you to infer that Goldman Sachs was not 'in trouble' is to imply that they were not as interdependent within the CDS market as every other investment bank. No doubt, GS was in much better financial shape than the others. BUT, Goldman Sachs fucked up like everyone else, and NEEDED HELP, including the "stamp guarantee" to prevent flight of capital from their coffers, and the bailout of CDS investment bank counterparties.
ha, ha. come on, Chemba. is anything "the Treasury's idea"? who cares whose 'idea' it was?!
"against their judgement"? ha, ha. come on, Chemba. do you believe the shite coming out of your mouth? Where was the "outrage" from Goldman Sachs about being "forced" to take TARP? They should have been publicly grandstanding about "moral hazard", fee markets, and 'a card laid is a card played'.
No, Chemba, Goldman Sachs was fucked and you know it. They, like everyone else, relied on such things as FDIC insurance and "The (Greenspan) Fed Put" that allowed for excessive risk-taking over an artificially prolonged expansion created by The Fed (hence, the real estate bubble).
for you to imply that Goldman Sachs was not royally fucked, albeit less than competitors, is to be as intellectually dishonest as the ZeroHedgers you moan about.
I despise "player haters" as much as the next person, so I understand your point about "populist movements" in rags like Rolling Stone magazine. But facts are facts, dude.
one more thing, YOU ARE A 'ZeroHedger'. In other words, you cannot say such things as "facts and truth are frowned upon at Zero Hedge" when you continue to come back here everyday for (at least some) facts and truth. You are a part of the sum, so keep bringing the well-needed facts and telling us where the rest of us have it wrong because I, for one, appreciate your dissent. we're all here to call 'bullshit' where we see it.
please, feel free, again, to tell me where i have things wrong. i know you will.
There is no way GS and JPM were forced to do anything. They want you to believe that. No conspiracy theories required when the reality of what occurred is so painfully obvious. They desperately needed the govt medicine, their only alternative to closing their doors, which, by the way, and contrary to to what GS and JPM would have you believe, would not have harmed the greater economy of the United States of America in any significant manner.
Believe the GS/JPM version of events if you wish. I cannot change your mind.
goddamnit, drop the fuckin analysis already, every day is an up day the end
Aren't you the young dim-wit who said stocks were going lower today, (becasue this site, and Tyler are always wrong)?
yeah for a minute I forgot how bullish this site is
SO BASICALLY, THE MARKET GOES UP 200 POINTS EVERY DAY AD INFINITUM?
Bloomberg reported that the entire stock market volume Monday was $6 billion, about 1/3 of normal volume. The Fed's stock pump on Tuesday was $5.2 billion. It appears that "ad infinitum" are the only words the Fed knows!
We have 3 options:
-We can kid ourselves
-We can fool ourselves
-We can stick our heads in the sand
Those are the policy options under consideration currently in Washington and across state houses across the country.
There is no real attempt at problem solving, brainstorming, thinking out of the box, or any of the survival skills used every day by the average American corporation or individual trying to make it in the world.
The only options under consideration are:
-How far should we kick the can
-How hard should we kick the can
-At what point should we kick it again
"Like I said earlier, you get one decent ISM services report and screw the mortgage mess or anything to do with housing - Cramer says it won't hurt us any longer. Way to go!"
Harry, I'm thinking sentiment is now like sector rotation, we should call it economic data rotation...simply pick the one that looks best and it's risk on bitchez!
This market is down right evil on the shorts...not sure there's many left after today's ass cleaning...
I'm still shocked that we actually caught a bid this high this fast, uncle ben has a huge fire hose full of green backs!
TGOV talks TARP...
Summary: We won monies for the taxpayers!!! But please don't ask us how much we lost.
http://www.financialstability.gov/latest/pr_10052010.html
The rationalization of the AIG failout in the pdf document linked in the above link is interesting, I guess.
Treasury gives themselves an A+ on their own report card!!!
housing is going down,we're over built and flush with stalled foreclousure.everyones gonna end up with a haircut on something, housing,bonds.stocks,pension,devaluation, few will come away looking good.
i agree "population dislocation" is all on here. now you know the "secret plan behind the interstate highway system."
"On the monetary side, we believe that substantial further stimulus is needed. "
How on God's green Earth is further stimulus going to help when the Marginal Productivity of Debt is neagtive?
Good bye dollar. Next up, tour buses full of the Philippine middle class buying up homes Bel Air.
+1
Here in Thailand the economy is booming, the top 10% that have big money are creaming profits left right and centre, and yes, investing overseas big time.
The fifteen families that own the Philippines would have no problem but the Philippine middle class probably has a way to go before storming the likes of Bel Air.
How DARE they suggest that with all the money printing we're doing, the economy will be fairly bad or WORSE!
Fuck this guy. He just wants another trillion dollar QE so he can take his cock sucking bonus and buy another beach house to bang his boyfriend Ben Bernanke.
I'll kick them in the nuts. The markets aren't rising, this is inflation! WTF!
Gawd what a buy signal
What does 'back to normal' mean?