Two Americas: one works, the other doesn't

Glenn Reynolds, AKA Instapundit, AKA the grandaddy of all bloggers, and arguably one of the most prolific and valuable contributors to the internet, has written an outstanding op-ed in today's USA Today. Here's the first part, but be sure to read it all:

There are two Americas, all right. There's one that works -- where new and creative things happen, where mistakes are corrected, and where excellence is rewarded. Then there's Washington, where everything is pretty much the opposite. That has been particularly evident over the past week or so. One America can launch rockets. The other America can't even launch a website. 

The silver lining to the Obamacare cloud (whose failure to launch after three years and billions of dollars of preparation makes Apple's iOS 7 "glitch" seem laughably insignificant) and to the federal government shutdown is that maybe, if we're lucky, the voters are going to take notice. Government can't do things nearly as well as the private sector can, and anyway, the government shouldn't even try. Perhaps more importantly, we are finding out that our economic life goes on just fine without the daily ministrations of the many millions of federal employees that are now officially considered to be non-essential. We should all be asking ourselves—just days after the 100th anniversary of the ratification of the 16th Amendment authorized the income tax—whether our federal government is really worth one-fifth of our collective incomes, even though it almost cost us one-fourth just four years ago.

If we're lucky, Obamacare may prove to be the "tipping point" that finally marks the end of Big Government as we know it. Republicans are probably doing us a disservice by insisting that Obamacare be de-funded or postponed. Instead, they should just let it happen and let it fail spectacularly, because it is guaranteed to fail no matter what. Government of the size we have today has reached the limits of its effectiveness. Government is now too vast to be efficient, too vast to be controlled, and too vast to achieve all the many objectives of its constituents. Republicans would be wise to wait until the Democrats beg to have Obamacare postponed. Then perhaps we can have a proper dialogue on the subject.

If you don't read Glenn on a daily basis, you should.

New blood coming to Congress?

The other day I had breakfast at the Dennys in San Clemente with Pat Maciariello, an energetic and level-headed conservative running for Congress in California's 45th District. (That's the Orange Country district adjacent to my district, the 49th, which is represented by the extremely capable Darrell Issa.) The 45th is currently represented by Rep. John Campbell (R), who is retiring, so it's an open race, and Pat is up against some seasoned pols, particularly Mimi Walters.

Pat brings a good deal of business experience to the table, plus a passion for free markets, limited government, lower taxes, and pro-growth policies—so you can see why I'm enthusiastic about his candidacy.

I'm also impressed with his willingness to take time out from a successful business career and use a good deal of his own resources to enter this fray. His motivation is simple: to change the world for the better, by helping to create a more favorable policy climate in Washington that promotes business, growth, and prosperity. He's an excellent listener, by the way, which tells me he is a good thinker and not an ideologue.

Our paths crossed thanks to a mutual friend and because Pat is the son of my favorite prof at Claremont Graduate University, Joe Maciariello. Since the days I was fortunate enough to work as the TA in his Benefit-Cost Analysis class, Joe has gone on to become arguably the world's foremost expert on the life and works of the renowned management expert Peter Drucker (whom I was also lucky to have as a prof). Pat's credentials are rooted in a solid academic background (Notre Dame, Columbia Business School) and the mentoring of a very capable father.

I'm compelled to admire and support someone like Pat, one of those relatively rare citizen politicians who feel the need to "give back" to the country that has enabled their success. We need more people like him who know how the world really works, and fewer of those who make a career out of politics. His enthusiasm is refreshing, and he reinforces my belief that the future holds the promise of better policies and more job opportunities than we have now.

http://votepat.com

Who needs government statistics?

So the federal government is shut down and the market is deprived of some key statistics, most notably the payroll employment report that we ordinarily would have gotten this morning. Is this a cause for concern? Not really, since there are lots of numbers out there that continue to come in on a daily basis from the market. These numbers are even better than government stats, since they are very timely, they aren't subject to seasonal adjustment, they will never be revised after the fact, and they reflect the cumulative knowledge and wisdom of hundreds of millions of investors and business executives all over the world. The message they send, at least as I see it, is that nothing much has changed of late, and the economy most likely continues to plod along at a disappointing slow rate. Nevertheless, the economy apparently is continuing to grow and improve, despite all the policy obstacles thrown in its way.

Here are just a few, in random order. All come from market-based indicators that are real-time as of today:

Corporate credit spreads reflect the market's perception of the default risk of the average business. Credit spreads today are about as low as they have been post-recession. The market, in other words, sees little reason to worry about default risk these days, and there is no sign of any deterioration of late.

2-yr swap spreads are excellent leading and coincident indicators of systemic risk in the economy. These spreads today are about as low as they have ever been. The market, in other words, does not detect anything bad going on. It would be highly unusual for the economy to deteriorate with swap spreads being this low. They tell us that financial markets are very liquid and transparent these days, and that is one very good reason to think that the economy is in decent shape and not suffering from any underlying deterioration.

The Baltic Dry Index is a measure of the shipping costs of bulk commodities. The index was quite low for most of 2012 and until this summer. But starting last June it began to pick up. It is now up 156% from the end of May. This likely reflects improving conditions in the Eurozone and Asian economies. At the very least it all but rules out any emerging weakness in the global economy. It's much more likely that the global economy is strengthening on the margin, given the rather impressive strength in this index of late.

The chart above shows the real yield on 5-yr TIPS over the past year. Yields have dropped about 50 bps in the past month, probably because the Fed failed to "taper" its quantitative easing program, and that in turn has caused the market to adjust downwards somewhat its expectations of future rate hikes. But yields are still up an impressive 120 bps from their lows of last April. I would argue that this is good evidence that the market believes that economic fundamentals have firmed.

C&I Loan growth (bank lending to small and medium-sized businesses) has slowed of late, but outstanding loans are still up some 30% in the past 3 years. This is good evidence of increased confidence on the part of both banks and businesses.

Commodity prices have been going sideways for the past several years, and remain at levels that are significantly higher than they were at the end of 2001. There doesn't appear to be any emerging weakness (or unusual strength) here.

The Vix index today is 17, and that's up quite a bit from the 12 it registered just two months ago. But as the chart above shows, that hardly moves the needle from a long-term historical perspective. The market is a little more worried right now (understandably, given what is going on in Washington these days), but the level of uncertainty is still relatively low. Whatever problems we are likely to face, as a result of the government shutdown and the upcoming debt ceiling negotiations, are, in the market's best judgment, probably minor.

The stock market still appears to be in an uptrend, but not in a bubble, as it was in the late 1990s and early 2000s.

Given all this, I think it's reasonable to conclude that despite the current lack of government-provided statistics, the economy continues to grow at a modest pace.