about economists who back Bush plan ?
Paul McCulley Endorses Bush Tax Plan
by: ridinycurve (59/M) 01/10/03 10:10 am
Msg: 44052 of 44054 on TEI board
Paul McCulley of PIMCO endorsed the Bush tax plan IN ITS ENTIRITY in an interview on CNBC yesterday. He feels the Democrats should concede moving the phased-in tax cuts forward since the Republicans won the election. Further, he stated that economists on both the left and the right have long held that the double taxation of dividends does not make sense and should be eliminated.
McCulley sees the entire package as Keynesian, and feels the Democrats should make it even more Keynesian by pushing for a temporary suspension of the payroll tax.
McCulley is an avowed Democrat.
He stated further that that the rally in the long-dated Treasuries is dead, and investors should look to European bonds for their interest-rate-risk and also take some credit risk in domestic intermediate-term corporates.
You can catch the audio and fuzzy video at PIMCO.com.
Separately, Bill Gross of PIMCO stated on CNNfn yesterday, that he expects the stimulus package to cause the long end of the yield curve to rise over the next few years, but it will not do so in any dramatic way. He also expects the annual budget to be in excess of $300 billion for several years, and that this size deficit was necessary due to the acute forces working against the economy.
Gross is also an avowed Democrat.
Unfortunately, Gross� interview was not posted at the PIMCO web site
More than that probably, but they all know how the system works. They have made big bucks in the last couple of years, and none expected it to go on forever.
Many are probably looking forward to spending some time with the kids now.
"We have had more than a year now of ST rates at new 40-50 year lows and the economy is still contracting measured by virtually every metric available."
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 4.0 percent in the third quarter of 2002,
according to revised estimates released by the Bureau of Economic Analysis. In the second quarter, real
GDP increased 1.3 percent.
As usual, E, there is some fact mixed in with your fiction. Many of your cited economic factors are correct, but there is the persistent disconnect that is so prevalent in your conclusions.
I�m not going to address all that. I guess anything can happen. It could snow on Pahokeeno today couldn�t it? What do you think the odds are?
<<Couple that with tremendous new capacity to originate>>
Now, E, I want you go to the blackboard and write 100 times:
�Origination capacity is very elastic�
I have long believed that the MBS markets (and the unprecedented REFI wave we have seen that DWARFS the fund flows in all markets--even 10 year treasuries) are driving the shape of the US yield curve to a large degree.
That puts NLY and the MBS REITs in the center of the storm, so to speak.
It is not surprising to me that the 10 year has found some resistance around 4% when looked at in this MBS context.
Bear Sterans has done some great work on coupon stacks in the MBS markets after the REFI wave--showing how mortgage borrowings have become concentrated in 2 coupons (6% and 6 1/2%'s) to an unprecedented degree.
This means that the continuous nature of REFIs we have observed in the past--with a wider distribution of coupons--is gone forever.
Couple that with tremendous new capacity to originate and a growing acceptance of REFI as "easy money" to borrowers and you have the sitaution we see today.
In an economy that continues to have ONLY one decent component (consumer spending) that is driven to a large degree (at the margin) by these REFIs themselves and you see how economic growth (and thus interest rates) can become a function of these REFIs.
So spending falters as REFIs dry up, leading to falling rates until the 6 1/2% become vulnerable to REFI. Rates then stabilize (as consumer spending comes back temporarily) only to begin falling again once the party is over.
The FED doesn't totally control ST rates.
Its power is not absolute in a market sense, any more than the specialist controls the price of the stock he trades. Sure, he can open IBM at $100 a share, but he can't force investors to trade stock there.
In the same sense, the FED cannot force investors (foreign or domestic) to buy ST MM instruments at essentially zero rates of return. Over the longer run, they cannot keep these investors from seeking the best rate of return available.
Of course they can use Open-market operations to keep the ST rates at or near these levels for a while, but what they CANNOT do is convince the debt markets that a 4% 10 year is consistent with the deflation that is OBVIOUS in those ST rates.
We have had more than a year now of ST rates at new 40-50 year lows and the economy is still contracting measured by virtually every metric available.
Yes US budget deficits create slope in the curve, but they have to be looked at in the context of the rest of the markets and world economic conditions:
Equity earnings continue to contract.
China is exporting deflation and will for years to come.
The labor markets are shrinking as jobs get exported (1000 US Companies now manufacture in China).
First world economies are sluggish and slowing.
Terrorism is creating friction in all forms of world trade--fund flows included.
Simply put, the longer ST rates stay low the more investors--foreign and domestic--will migrate into the belly of the curve from other securities (ST Treasuries included).
<<Also, don't be too sure a falling dollar won't put more upward pressure on ST rates (at essentially zero now) than it does on LT ones.>>
E, you keep forgetting that the Fed controls short term interest rates, irrespective of what the dollar does. Its power over short-term rates is absolute.
If you don�t grasp this point, you will never grasp the big picture.
Could be you are right. We will see.
But the dollar has been falling now for months and we have had 2 rounds of "fiscal stimulus" already in the first 2 years of the Bush Presidency, meanwhile the 10 year has gone from 5 1/2% to 4%.
I look around and see an economy that is firing on only one cyclinder--REFI driven consumer spending. Raise long rates and you will see real estate collapse along with our meager economic growth.
Also, don't be too sure a falling dollar won't put more upward pressure on ST rates (at essentially zero now) than it does on LT ones.
<<I just don't think higher LT interest rates are in the cards with the economy weak (and getting weaker) while spending is held up ONLY by credit driven consumption.>>
E, an IBMer friend of mine from back in the old days use to tell me that the most loyal customers he had were those who tried something else then came back to IBM.
The reverse will be true for you. Those who follow your misguided economic advice will be your biggest detractors when the day is done.
The Fed and fiscal policy may not jump start the economy; but, with fiscal stimulus and a weaker dollar, long rates will rise most assuredly, albeit probably at a slow rate. And in a weak economy, short rates won�t rise.
What do you do for kicks, stick pins under your fingernails?