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March 2, 1990
The week started out well with a Fedeasingtocome, 10.5% decline (worst ever) in Durable Goods Orders. The rest of the week we could have done without.
Subsequent data releases delivered body blows to the bond market. The first was a revision of the 4th Quarter Gross National Product from .5% growth up to .9%. Annual growth in the 1% range is not exactly a house afire boom, but it's no where near weak enough to moderate inflation.
The crusher was Thursday's Purchasing Manager's report showing an index jump from 45.2% in January to 48.3% in February. That's a move from nearrecession to near pinkcheeked health.
There is a natural tendency in the securities market public relations press to magnify news trends whether good or bad. Once the herd is moving in either direction, the business is more profitable if the herd can be encouraged to speed up.
Fearmongers are in charge right now, and the favorite topic is a worldwide shortage of savings due to the borrowing requirements of Germany and Eastern Europe. This Chicken Little line holds that the U.S. won't be able to finance its budget deficit without much higher interest rates. Resist impulses to panic.
The panic inducers want you to believe that the global pool of savings is a fixed supply for which all borrowers compete. Not so. A modest rise in interest rates of the kind we have seen in 1990 is enough to create large quantities of savings, and simultaneously discourage many borrowers.
It is also worth keeping in mind that the entire German economy is no larger than the sum of money that our Treasury spends each year.
However, the panic pushers provide opportunities for those whose operations require camouflage. Chairman Greenspan said this week that Eastbloc capital needs are "the most important fiancial issue of the decade."
This wildly improbable assertion sounds to me like a Fed Chairman who has tightened, and wants us to believe that any recession is a Sieve Curtain accident.
The Fed has tightened, and it is perverse good news which will slow the rise in mortgage rates. But just slow it, not stop it, until a somebodyelse'sfault recession appears.
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