Smash Mouth

Smash Mouth Economy


This week’s economic data was lackluster to say the least. Empire Manufacturing was poor, Philly Fed was negative. Continuing jobless claims only came in lower because the previous week’s data was revised upward to over 4.5 million (the highest in nearly two months.) Even that old interest rate driver, inflation, was tame on both the producer and consumer side. Pundits, politicos and equity bulls were all hard pressed to find positives in the data (though the lovely, but seemingly dim Becky Quick of CNBC sure did try.)

However, the data is not pointing toward a double-dip recession, at least not yet. The data is pointing toward slow forward progress. If one were to compare the economies of the past two decades to the high-flying San Diego Chargers’ offense of the late 1970s / early 1980s, the current economy may be more similar to the offense of the 1990 New York Giants which succeeded with 3.5 yard gain after 3.5 yard gain. This is a “smash mouth economy.

What exactly is a “smash mouth economy?” It is an economy where growth must be hard-fought. Nothing will come easy and bug gains will be few and far between. However, if the defense can hold up, the U.S. economy can succeed. In this case the defense is government policy. Poor decision on that side of the economic ball can doom the recovery because the offense (U.S. consumers and small businesses) do not have ability to reach the goal of success if they are placed in a deep hole.

This flies in the face of those who said that there must be a sharp and robust recovery because the recession was so sudden and. Such views are not well thought out. There are factors which make recoveries robust and sharp after recessions. The main factor is to put cash in the hands of those who are willing and able to spend it. During the past two decades that was done via ever cheaper and easier to access credit. This is not a sustainable economic model. As we have so rudely discovered, rates cannot be set ever lower (zero is finite) and eventually you run out of people who can borrow.

There is a similar flaw in relying on housing to be the driver of U.S. economic growth. Real estate values should be the result of a healthy economy, not the main source of economic growth. After all, we can’t build large numbers of homes forever. Eventually you run out of space and, as the population ages (and possibly shrinks as in Europe and Japan), you run out of qualified home buyers.

A very knowledgeable fixed income strategist whom I know and respect states that he believes rates remain anchored at these levels with the risk of heading lower in the near term. He also believes that the Fed will be on the sidelines until at least mid 2011. I agree with him. Short-term rates remain unchanged for at least a year. Long-term rates will slowly rise over time, but the 10-year stays under 4.00% for at least another year and the economy moves forward three yards at a time with a cloud of dust.