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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Long vs. Short-term view


HOPKINS: Yes. The question is whether the stock market is going to hold. Money definitely moved out of bonds into stocks today on this expectation that the lower interest rates were going to help the economy and stocks. But whether that is a long-term view or a short- term view, we'll see in the next few days.

DOBBS: Well, Jan, let's get both views. Let's turn to Lakshman Achuthan and find out, an economist without peer, precisely what is going on here. Jan points out we saw the 10-year note go to 4.08 after being down to 3.99, I believe, was the low today. What is your best thought?

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INSTITUTE: That is a rate cut. Everybody is all upset about what did the Fed do yesterday. The debate is did they cut, did they recognize weakness, this and that. The whole point of these Fed easings, the 11 cuts in 12 months, is to bring down borrowing costs. And you've seen it in the bond market like crazy.

DOBBS: I hear this talk about cutting interest rates and the Fed. The fact is we're sitting here at 40-year lows. We're at 40- year lows on the 10-year note. We're at 40-year lows in terms of all of the central bank notes.

ACHUTHAN: Worldwide, they're going down.

DOBBS: I mean, what's it going to do for the consumer?

ACHUTHAN: Well, the consumer keeps -- first, you've seen a move.

DOBBS: Aside of mortgage rates.

ACHUTHAN: Well, mortgage rates are pretty big. Housing is a huge driver of this economy. When you buy a house, you buy furniture, you buy all kinds of things.

DOBBS: No, no, no, I understand. But these rates have been down there. We've seen the greatest refinancing in the history of the country.
ACHUTHAN: You're going to see even more record-breaking refinancing and new home purchases.

DOBBS: OK. We have also seen the greatest number of personal bankruptcies during the same period. We have got consumer debt stacked high.

ACHUTHAN: Right. Well, the debt is high, but if the interest rates are low, your payments...

DOBBS: Well, it's not changing those consumer rates.
ACHUTHAN: No, but -- well, look...
DOBBS: But it's not changing those consumer rates.

ACHUTHAN: Look at what is happening in the economy. The consumer is spending...

DOBBS: I know you're going to talk macro. I'm going to talk micro.

ACHUTHAN: OK.

DOBBS: What is it doing for the consumer who is sitting there with the greatest debt burden in years?

ACHUTHAN: They're able to make their monthly payments.

DOBBS: Yes, but not because these rates are sitting at 40-year lows (UNINTELLIGIBLE)...

ACHUTHAN: No, but that's -- they are.

DOBBS: They're getting hit with 20 percent rates on credit cards. They have refinanced. You have seen the greatest refinancing...

ACHUTHAN: You have a huge boom in house ownership. When people buy houses and they refinance, they're getting these low rates, they're paying off higher-term debt, and that is what's happening.

DOBBS: When you looked at these refinancings and you see people taking these home equity loans and carrying their debt and taking that equity and converting it to payments on other debt. That can't be a positive sign.

ACHUTHAN: It's -- ultimately, bottom line is you're having consumption growth. At the same time -- so, the consumer is still in the game. They've been keeping this economy...

DOBBS: Oh, the consumer is in the game, but the consumer is just beaten to -- I won't use the word.

ACHUTHAN: But people have been saying the consumer is done for how long? Years, and the consumer has kept going. Income has kept rising through this recession, and you've had -- so you have the consumer keeping this economy afloat. At some point, the split between the confidence that the consumer has and the economy and the confidence that the businesses don't have will have to be reconciled. And I think...

DOBBS: Well, it's getting reconciled. It's getting reconciled. We have got an economy that we know now had three-quarters of negative GDP. We know that we've had to revise these numbers down. Now, what we want to know is is there going to be a double-dip recession?

ACHUTHAN: No, not this year.

DOBBS: OK. Absolutely not?

ACHUTHAN: Not this year. It's not in the numbers this year. And the key to avoiding a double-dip recession next year is for the businesses to join the consumers. They have to have some confidence that the consumers are going to be there in August, in September. And as that happens, the businesses will be forced to spend.

DOBBS: They'll be forced to spend.

ACHUTHAN: Because the consumers are creating the demand, it's there.

DOBBS: Do you think they can sustain another year at this rate?

ACHUTHAN: Another year, I don't know.

DOBBS: OK.

ACHUTHAN: I'll take it to the end of this year.

DOBBS: We're going to have you back by next week and we're going to figure this thing out all over again. Lakshman, as always, it's great to have you here. Thanks.

ACHUTHAN: Thank you.

DOBBS: And I hope you're right.
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