Three out of four isn’t too shabby. New orders for durable goods fell last month, the first decline in the last four months. Even if we maintain that success ratio, rebuilding the business of durable goods manufacturing is going to take time. Therein lies the symbolic challenge for the broad economy. Recovery is underway, but it’s still unclear if it’s sustainable at a sufficiently high pace to make a dent in the damage of the past two years. In any case, we’ve still got a long way to go.
JOBLESS CLAIMS FALL, BUT THE THREAT OF GOING NOWHERE FAST STILL LOOMS
Initial jobless claims dropped last week—the first since the drop at the end of March. But the question remains: Is the broader trend stuck in neutral?
NEW MONEY, SAME OLD CHALLENGES
Nothing really changes in the money game, although the face of the currency gets a makeover every so often, as the redesigned $100 bill attests. “In order to protect your money and keep counterfeiting low, the United States government continues to enhance the security of its currency,” the Treasury’s “New Money” web site reports. The latest roll-out is the new C note, which “incorporates the best technology available to ensure we’re staying ahead of counterfeiters,” said Secretary of the Treasury Tim Geithner in the accompanying press release issued today. Colorful, isn’t it? Of course, there’s still no technology that will prevent currencies, freshly designed or not, from losing their purchasing power. That age-old challenge still requires some very old-fashioned ideas.
THE IMF ISSUES A RED INK WARNING
We’ve heard it before, but the IMF is telling us again: there’s a lot of debt sloshing around in the global economy, and more is on the way. The question before the house: At what point will ballooning deficits reach the financial tipping point? Whatever the answer, we seem to be moving closer to that hazardous peak. That doesn’t mean we’re destined to reach it, but the alarm bells are now ringing loud and clear.
THE KEY QUESTION IN THE GOLDMAN SACHS CASE
The SEC’s case against Goldman Sachs, in which the investment banks is charged with fraud, raises a sea of questions, ranging from: What defense will the company use? How will the case affect Goldman’s business and reputation? What will the legal precedent be for dealing with clients? But the at the core of what promises to be a legal thicket is a rather simple narrative that demands a simple answer. James Stewart in today’s Wall Street Journal explains:
Goldman hasn’t disputed the basic facts in the SEC’s narrative: (1) that the company allowed its client Mr. Paulson, who famously made billions betting that subprime mortgages would default, to play a role in the selection of a portfolio of the worst imaginable subprime mortgages that would be packaged into a collateralized debt obligation, and (2) that the bank failed to disclose to clients to whom it sold those CDOs that it had, in effect, let the fox into the henhouse. Goldman claims its sophisticated clients wouldn’t have cared about such information or considered it important, but if that’s the case, why did Goldman conceal it? Goldman collected millions of dollars in fees from Mr. Paulson, who bet against the doomed securities, and from the clients who invested in them.
A QUICK LOOK AT THE STOCK MARKET’S FUTURE
In yesterday’s post we discussed the idea of valuing the stock market like a bond, which is inspired by the academic research and the historical record. Today, we apply the concept to the real world by plugging in some numbers in an effort to develop a bit of perspective on estimating the long-run return for the stock market. It’s an imperfect art, to be sure, and one that ultimately requires far more detail than we can provide here. But every journey starts with a first step.
VALUING THE STOCK MARKET AS A BOND
No one should confuse stocks with bonds, but there’s a case for valuing equities as if they were fixed-income securities. There are several caveats, of course, but that’s always true with financial analysis. The question is whether there’s anything to learn when it comes to analyzing stocks as would-be bonds? Yes, although it’s not a silver bullet, nor is it helpful for short-term trading. And to the extent we do so, this valuation approach should be used simultaneously with other techniques. That said, there’s something to be said for taking a page from the world of fixed-income when assessing the stock market.
WHY THE GOLDMAN & PAULSON SAGA SOUNDS FAMILIAR
Yesterday’s news that the SEC charged Goldman Sachs with “defrauding investors” for selling a subprime mortgage product is eerie because much of the process that created it was profiled in last year’s widely reviewed book The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
GOLDMAN TAKES A HIT…
Wall Street is a shadow of its former self, and not just because of the financial trauma in late-2008. Technology has long been reducing the relevance of big-city financial centers. Much of what passed as standard operating behavior among previous generations of bankers and money managers working in the financial canyons of New York, London and other cities can now be accomplished in the hinterlands, and probably at a lower cost. But if the writing has been on the wall for some time, it may be accelerating with today’s news that the SEC has charged Goldman Sachs with a rather large fraud in regards to its dealings with the subprime mortgage market. (Goldman denies the charges and claims the government’s case is unfounded.)
A RECOVERY IN HOUSING?
With each new data point, it’s clear that the economy is no longer contracting. The signs have been bubbling for months, and today’s update on new housing starts and building permits offers another round of statistical support. But while it’s tempting to conclude that the economy’s poised for a robust, sustained run of growth, that’s still premature. As we’ve been discussing for much of the past year, the time gap between the end of economic contraction and economic growth is likely to be longer this time. In turn, that means that the recovery is vulernable to a fresh bout of weakness once the initial bounce fades. That’s not fate, of course, but neither is it far beyond the pale of possibilities, given the breadth and depth of the Great Recession’s lingering complications.