Putting a Stake in the Bond-Bubble Brouhaha

At long last, we're starting to get notable push-back on all of this bond-bubble foolishness.

First, Felix Salmon last night made the quite simple, but cogent, point that low yields are justified by the fundamentals, unlike, say the P/E ratio on Pets.com in 1999:

"Treasury yields are indeed low right now, but that’s largely because the economy is weak."

What a concept!

Then, Richard Barley's Heard on the Street column in today's WSJ drives home the most important point of all in this discussion for investors:

"Suffering a manageable loss on holdings of Treasurys if the recovery continues and yields rise may be preferable to sustaining a large loss on stocks or other risky securities if the Fed fails."

Quite right. There may not be much more upside to bonds, but the downside risk is manageable and far preferable to the risk on the other side.

And we caught a glimpse of that downside today, with a surge in jobless claims to 500k -- in the payroll-survey week, raising the possibility of a negative payroll print in August -- and the drop in Philly Fed's factory index back into negative territory.

This is double-dip stuff here, and the 10-year is right to be at 2.575%.

Updated:

And later today Rosie just straight-up turned a firehose of fact on the bubble-spotting tomfoolery of Jeremy Siegel and Jeremy Schwartz:

The case against the bond market that was made was pretty weak, which goes to show that just because you have the pedigree of being a professor from Wharton doesn’t necessarily mean your call on the Treasury market will prove to be any more prescient than your call on “Stocks for the Long Run.”

Ice cold!

James Ledbetter is a Fucking Moron

There's not much on the business-news Internet more useless than Slate's Big Money site, where financial writers who couldn't hack it at SmartMoney or Bloomberg sweat desperately to run financial-news stories of the day through Slate's knee-jerk contrarian wringer, to the benefit of no one. (Updated to add: Actually, Big Money seems to be mercifully defunct. The article complained about herein was posted with the "Moneybox" brand.)

Today's example (heck, pretty much every day's example) is James Ledbetter, who today trudges to his keyboard to peck about how he is oh-so-exhausted of this tiresome worry that the U.S. is somehow turning into Japan.

Now, it is perfectly legitimate to argue that the U.S. is not turning into Japan. I'm not even sure I believe it myself. Ledbetter does list some of the legitimate reasons why the U.S. might not be Japan, in the less-edgy lower half of this story.

But as is so often the case with Slate articles, the top of the story and the kicker -- the icing on the bullshit cupcake, as it were -- undermine the entire piece's credibility by toiling to erect a large, shaky strawman that can be heroically chopped down.

In this case, the straw man is the idea, which exists not in reality but in the deadline-harried brain of James Ledbetter, that the very question of whether we're turning into Japan is purely a matter of political slant, and more specifically your ideology vis a vis fiscal stimulus:

Thus, the fear-Japan crowd splits into two basic camps: There are those who point to the Japanese experience to argue that stimulus by definition does not work—or is not worth the level of government debt that it creates. (This camp includes the Reason Foundation and just about any opinion published in the Wall Street Journal.) And there are those who think that we need to fear the Japanese scenario because Japan's stimulus was too little, too late. (Paul Krugman leads this camp.) It's almost comical to have advocates of two completely opposed financial strategies pointing to the same fearful scenario and saying, "We'd better not let that happen!"

Yes, I guess that would be almost comical, if it were based in reality.

The truth is that reasonable people, by which I mean pretty much everybody in the economic mainstream, agree that fiscal stimulus was useful, that the stimulus enacted last year may not have been large enough to create sufficient demand in the economy to avoid a weak recovery, that a second stimulus package will almost certainly be necessary as a result, and that if one is not forthcoming, then the deflationary deleveraging process currently gripping the economy will raise the risk of a Japan-like outcome.

There are lots of other things wrong with his analysis, including:

* His argument that the size of the preceding bubble has anything to do with the depth of the subsequent pain, which completely misses the point; it's not the size of the bubble that matters, but the size of the debt, and that is mountainous.

* His argument that four quarters of economic growth in the U.S. mean deflation can be avoided, which certainly does not preclude deflation; it didn't in Japan's case.

* His argument that the general tidiness of non-financial corporate balance sheets means we can avoid deleveraging ignores the messy balance sheets of everybody else (including the banking sector, which he rightly notes as a potential trouble spot at the end of the article, cutting off this leg of his argument).

But his main point, that the turning-Japanese debate is basically about political ideology, is completely pulled from his ass.

Thomas Hoenig, Menace II the Economy

How does someone this stupid get to be a Fed President?

Hoenig tells the Times:

I advocate dropping the ‘extended period’ language from the F.O.M.C.’s statement and removing its guarantee of low rates. This tells the market that it must again accept risks and lend if it wishes to earn a return.

Has he not noticed? The market is accepting risks, lending like crazy to good credits that want credit. Rates everywhere are at rock-bottom because there's so much demand to lend.

But that's just about the only good thing going on in the economy now. And there is far more demand to lend than there is to borrow, which is another reason rates are at rock-bottom and the main reason why Fed policy is not going to cause inflation. Push market rates higher by removing the "extended period" language, and even this small amount of lending slows down.

Asshat Trick

I've been watching Bloomberg TV lately just to avoid the asshats on CNBC. No such luck. Just now, Bloomberg's esteemed panel included Jeremy Siegel, who believes it is always a great time to buy as many stocks as possible; Brian Wesbury, who perpetually sees an economic boom to which nobody else is privy; and Allen Sinai, who was explaining that the corporate tax rate is too high and needs to come down. What, Don Luskin was unavailable? You'll get more useful financial information by going down to the Greyhound bus station and engaging drifters in conversation. The smell would be more tolerable, too.