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September 11, 1992
Though long rates had risen a bit by week's end, the down trend likelihood continues.
The short, holiday week brought little data. The August Producer Price Index gained only .1%, and the "core" rate fell .1% outright. No inflation here. Initial Jobless Claims rose to just under 400,000.
Given the bad labor statistics last Friday, the only surprise is that mortgage rates haven't quickly moved to even lower new lows.
The same sort of statistics in early June caused an abrupt halfpercent drop in rates. Why not this time?
Politics.
No, we are not reversing ourselves; the election itself matters little to the financial markets. There is no disaster or special benefit waiting in midNovember depending on who wins.
In the meantime, the election campaign is exposing the unwillingness of either presidential candidate to take a serious position on the Federal budget.
Yesterday, Mr. Bush offered a new economic plan which includes a 1% income tax cut for everybody. The money to fund the tax cut is to be found in an unspecified spending slash.
Meanwhile, Mr. Clinton made clear his opposition to limits on Medicare and Social Security, and reinforced his pledge to put our financial house in order by increasing taxes on those making over $200,000 per year.
It is difficult to describe the rage inspired in the financial markets by this deceptive foolishness. No wonder long term rates rose this week.
Financial people (whether privately conservative or liberal) know that you could entirely confiscate the incomes of the top 1% of earners, and still not balance the budget.
"Unspecified spending cuts" cause a contempt so severe that investors want to sell bonds and mortgages, not buy them.
Traders fear that both presidential candidiates will soon be in a spending stimulus bidding war, both pleading the need to jump start the economy. Mr. Clinton already has $200 billion in "investments" on the table, and Mr. Bush has lately become the champion of Federal goodies.
The good news is that a responsible budget solution is not very hard: all the markets require is a real commitment to gradual deficit reduction. The whole national debt can be rolled over forever, and an immediate budget balance would wreck the economy. A left or right tilt to the commitment doesn't matter a whit to the markets.
The amazing (and hurtful) thing is that both candidates prefer running on fog rather than for a clear mandate.
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