Larry Kudlow's out to lunch, screaming that Obama's "welfare-izing" the housing market and that the world is "
ignoring signs of the imminent recovery".
As Team Obama readies its nearly $300 billion mortgage bailout — a plan that at best will have only minor positive impact, and at worst will welfare-ize the housing sector even more — there are recovery indicators out there that are being ignored by the pessimistic administration and its media allies. Consumer incomes, after tax and adjusted for inflation, have increased for five straight months, which is largely from the tax-cut effect of plunging energy prices.
Housing affordability is at a record high. Purchasing-manager surveys are now bottoming out. Fear-based credit spreads continue to decline. The money supply is expanding rapidly. And commodity prices are bottoming.
Well, let's take a look at Larry's indicators.
First, consumer incomes did go up in January, but actually went down in the preceding 4 months when adjusted for inflation. Disposable personal income did stabilize in January and increased somewhat. But the problem is wages are still stagnant and have been for several years. Adjusted for taxation and inflation, wages have gone down. However, the drop in gasoline prices for the consumer from July to January has helped. But now that energy prices have stabilized, that effect is largely over. Consumers have adjusted to the new energy prices, and because many energy consumers like airlines are locked into those high prices, consumers are still paying higher prices and not passing savings on to consumers.
Second, Kudlow is right when he says housing affordability is in fact at a record high. The index hit 158.8% in December 2008, meaning the median income family has 158.8% of the income needed to purchase a median home on a mortgage. But (and here's the big but) that assumes that median family has 20% down up front and does not pay more than 25% of their income on the mortgage. Right now, both of those are huge, huge assumptions. 20% down on even a median home in the US right now is still roughly $36,000. Many Americans can't afford that, we've become a nation hocked up to our eyebrows in debt. That average American family is carrying $8,700 in credit card debt, in fact. That 20% down is not an option. The barrier to affording a home is not the price of the home, but the up front costs of the tight credit to get a mortgage loan.
Third, the ISM's purchasing manager survey has stabilized, but it's still at 35.8 from 35.6 the month before...anything below 50 still represents contraction in the manufacturing sector. The sector's only dying at a slightly lower rate. Recovery would be above 50.
Fourth, credit-spreads are greatly improved over last year, but they are creeping back up, and lower LIBOR rates still have yet to improve lending to consumers.
Fifth, the massive increase in the money supply (it has nearly doubled over the last several years) still has yet to unclog the credit crunch. In fact, those dollars are disappearing into the void of Asian economies as they scramble to get out of the Euro. The upshot is while the dollar is getting stronger, it's killing US exports, and eventually that massive oversupply of dollars is going to lead to a massive inflation spike. It also means the collapse of the Euro, which brings about a host of new problems.
Sixth, commodity prices have bottomed out? Are you serious? Gold hit $1000 briefly last week. It's down to $915 or so again, but at any point gold is going to explode. But Kudlow has one final point:
And then there’s one indicator that never gets enough credit — the shape of the Treasury yield curve.
When short-term rates moved above long-term rates back in 2006, Ben Bernanke rushed to tell us that it would not signal a recession since interest rates were too low and historical precedence would not apply. By the middle of 2006, this curve had turned decisively negative, and roughly a year and a half later the economy headed into recession.
Which is also true. The opposite however isn't true, and with interest rates now in the toilet, the veracity of a normal curve meaning an expanding market just isn't the case in an economy like this. Kudlow's smoking something...and where was he on the inverted treasury curve in 2006? Oh yeah,
he was full of shit then...
As I've discussed on CNBC's "Kudlow & Co.," the strong, across-the-board, five-month rally in stocks cannot possibly be predicting a recession. While the stock market can sometimes emit false positives on recessions, rarely does it give off false negatives. In fact, I think it is predicting a "Goldilocks" soft-landing for the economy.
...and he's full of shit now. Go away, Larry. Bonus Larry Stupidity:
A question for Krugman: When in the history of humankind have we had a recession when business profits are rising by 30 percent?
When they're lying about their assets, Larry.