Ominous Signs at the Periphery VII

From April 18

Will Greenspan bite the bullet and continue raising interest rates as we need? This will support the dollar, slow inflation, cause a recession, and increase the US internal savings rate. It needs to be done, but I don't know if he has the guts to do it. We need a recession fast, so we don't have a depression in a couple of years.
Stay tuned..d

Danielle DiMartino
Economic slowdown may be worse than a mere soft patch
11:00 PM CDT on Sunday, April 17, 2005

By DANIELLE DiMARTINO / The Dallas Morning News

So much for that post-election bounce.

Last week's stock losses all but wiped out the gains investors booked in the huge relief rally that followed the election.

For the year, the Dow and the S&P 500 are down by about 6 percent. Double those losses for the Nasdaq. Perhaps more troubling is that for the first time in three years, stocks lost ground in the face of falling interest rates and oil prices.

The message is clear: This time, the economic slowdown could be so severe that low interest rates won't bail the country out.

As Martin Barnes, economist at the Bank Credit Analyst research firm noted on Friday, "Ominously, the drop in oil prices and bond yields in the past week or so has not lifted equity prices."

His advice is to steer clear of equities for now because the Federal Reserve is not finished raising interest rates and the economy appears to be skidding into something more meaningful than a soft patch.

Friday's last three economic reports showed a dire tone:

•A New York gauge of manufacturing activity fell to a two-year low in April and new orders actually posted a decline.

•Factory output fell for the first time in six months in March, with auto manufacturing sliding by 3.6 percent, its most severe in more than four years.

•Consumer sentiment fell to a 19-month low on concerns about steep prices at the pump and a still-weak job market.

All of this piled onto a bad week. There was the biggest miss by the consensus on retail sales since last August. Excluding autos and gasoline, sales were negative. And the trade deficit came in at a record $61 billion.

The data hasn't improved since the month started with the news that March payrolls came in at half of what had been expected. By the time the month ends, most economists will have shaved a full percentage point off their estimates for first-quarter economic growth.

David Rosenberg, Merrill Lynch's chief economist, is one of many who by the end of the week were cutting estimates for economic growth and voicing concerns that we're headed for something deeper than last year's soft patch.

"Look out for the softest pace since the second quarter of 2004 on GDP growth," he said. "The grim reality is that the Fed viewed this as a pause back then and may well treat the current soft patch as little more than a minor bump in the road this time around as well," he added.

The market is broadcasting that we're on course to collide with something bigger than last year's speed bump.

How is it doing this? The benchmark 10-year Treasury fell last week to about 4.25 percent, retreating to where it started the year and wiping out the nasty episode that tacked on nearly a half-point to its yield on inflation concerns.

Yet stocks fell. For the last three years, it has gone like this: Falling interest rates equals cheap credit equals fresh support for consumer spending equals rising stock prices. But that wasn't what happened last week.

Interest rates fell, which means bond prices rose. And yet stock prices fell. There's one thing the stock market fears more than a Fed that keeps on raising rates, and that's a Fed that stops raising rates.

The only call to pause will be an economy that has slowed too much to handle the gentle pace of the rate-hiking campaign we've been on for the better part of the last year.

As tempting as it may be to pause, my hope is that the Fed holds its ground.

Leaving office in the shadow of a recession will make for a much nicer legacy for Alan Greenspan than steering the economy into a worse state of imbalance by making money cheaper yet again.

Further excesses will only set us up for a future that makes us wish for something as tame as a recession.