Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1410.4	2.6	0.18%
Eurostoxx Index	2432.9	-9.2	-0.38%
Oil (WTI)	95.95	-0.4	-0.39%
LIBOR	0.422	-0.001	-0.24%
US Dollar Index (DXY)	81.45	0.082	0.10%
10 Year Govt Bond Yield	1.65%	0.02%
RPX Composite Real Estate Index	192.1	-0.4

Markets are flattish after 2Q GDP was revised upwards and Mario Draghi defended the ECB's bond buying program. Pending Home Sales increased 15% YOY in July, another sign of life in the residential real esate market. Bonds and MBS are down slightly.

Second Quarter US GDP was revised upwards to 1.7% from the initial 1.5% estimate as consumer spending was a bit higher than initially thought. The  upward revision was expected so there was no reaction in the index futures. Growth 2% or lower will probably not be enough to lower the unemployment rate

One of the reasons for the increase in house prices has been the lack of distressed sales. CoreLogic's latest foreclosure report bears this out, as foreclosures dropped 24% in June from a year ago, which is the lowest level since 2007. That said, the pipeline remains at 1.4 million homes and REO sales have declined while foreclosures have continued.

Fed-Bashing was one of the themes at the Republican National Convention. Certainly a part of that is driven by the desire to keep Libertarians in the tent in the fear that Gary Johnson could pull a Ralph Nader and peel off enough Republican votes to deliver the election to Obama. Bob Corker wrote an op-ed in the FT criticizing the dual mandate. He does make a good point that bond prices should be important signals to the economy, but that signalling process is broken because of Fed manipulation.

My gripe with the dual mandate has always been that it encourages bubbles - as long as inflation (as measured by the CPI) is behaving, the Fed must keep the pedal to the metal. Economists have accepted the fact that too much money chasing too few goods is a bad thing, but somehow think too much money chasing too few assets is okay.  Since the dual mandate was enacted in 1978, we have had the following bubbles (or mini-bubbles):

• Gold and oil in the early 80s
• Junk bonds in the mid / late 80s
• Emerging Market Debt in the early 90s
• Stock Market bubble in the late 90s
• Residential Real Estate bubble mid 00s

Given that the consequences of getting it wrong are assymetric, maybe it is time to reconsider the dual mandate.  Of course a change in the dual mandate has zero chance of being enacted, but I would like to see the discussion move from theory (market signalling) to practice (the housing bubble).  Of course we can always show people this awesome video.  While it isn't necessarily all about monetary policy, it does show the perils of a hyperactive Fed.