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July 3, 1997
Sheer perfection. No sign of trouble, no sign of possible trouble. The economy is so perfect that the Fed stood still, and may regret its .25% bump in March.
News of perfectly moderate economic growth has pushed bond and mortgage yields down close to 1997 lows, at 6.61% and 7.75% ("zero and zero"), respectively.
In this morning's employment report, non-farm payrolls grew by 217,000 jobs in June, 3,000 jobs below the nearly perfect consensus forecast. (Watch out, guys: in a world this perfect, you can get fired for a mistake like that.)
Sales of new single family homes exploded to a 7.1% gain in June, no doubt aided by falling mortgage rates. But in a perfect world, there is nothing to worry about. Low rates in a strong economy can't possibly cause an inflation problem because everyone knows there can't be any inflation.
People who have been wrong often resort to sarcasm, and I've been wrong for a month. Not by a lot, but old-timers who had their hides taken off in the late '70's and early '80's are always worried about hot economies and inflation.
In the first 90 days of 1997, the economy was red hot, racing at a 5.9% pace. The consensus for the second quarter of the year, just ended, says that growth has fallen all the way back to a 1% annual pace, 2% tops. Perfection.
However. Two ever-so-tiny flaws in this ideal universe: one, please explain how the stock market fits in the perfect picture; and second, how do we improve on perfection?
The nirvana equation goes like this: downsizing and productivity gains mean that the economy can grow as fast as 3% per year without inflation, and the economy is safely within that threshold. Therefore, interest rates should be low, and can go lower.
So far, neat. Cool, in fact. However, would somebody tell me, without mentioning aliens in Roswell, how a slowing economy can generate double digit growth in corporate profits -- four to six times the rate of economic growth? And -- slow economy, mind you -- why the S%P 500 is up 40% in the last 12 months? And why, in the presence of titanic profits and scarce labor, nobody wants a raise?
My apologies. In the '90's, you're not supposed to quarrel with perfection.
How do we improve on perfection? T-bond yields have kissed 6.50% six times since March, 1996, and each time rebounded to 7.00% or more. Mortgages, six round trips from 7.75% to 8.50%. In the last 25 years, what economic conditions prevailed, and for how long, when T-bonds fell below 6.50%, and mortgages below 7.75%?
Three months at the end of 1995 when Nitwit Gingrich shut down the government, and nine months in 1993 when the Fed was trying to get us out of a recession. That's it.
The guess here sticks: if you get a quote with a seven in front of it, take it, because we won't be here long.
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