5/14/14 – Back to the Old Normal

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 14, 2014 1:30:00 PM

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There are no blockbuster news stories today, but several items play into the theme of how “old normal” things have become.

Fannie and Freddie: still major players in the housing market

In a shift in policy, Fannie Mae and Freddie Mac, the two government-owned mortgage giants, will focus on ensuring that more home lending gets done, rather than limiting the mortgage market. (Remember, these are the firms that enabled massive overlending and the housing bust.) Lending limits will be maintained instead of scaled back, as previously proposed, and the firms will retain their role at the core of the housing market. Back to the old normal.

Business tax breaks (with no plan to pay for them)

On Tuesday, the Senate voted 96–3 to take a look at a package of business tax breaks—without suggesting any spending cuts to offset them. I noted yesterday that we’ve made significant progress on the deficit, but while the hole is getting smaller, we’re still in a hole. You can argue that many of these tax breaks are helpful for the economy, and in several cases I’d agree, but the fact that we’re back to consensus on cutting taxes and maintaining spending is very old normal.

Looking further back, the New York Times points out that the share of U.S. income that goes to the top 1 percent is now at the same level it was in 1913—just prior to passage of the national income tax. Given this political backdrop, perhaps we’ll be seeing some tax increases as well as tax breaks.

And politics as usual . . .

Karl Rove and Hillary Clinton are getting into it—probably a forecast of what the next presidential campaign will look like, and certainly a throwback to an earlier era.

And, of course, Russia is now threatening Europe, with the Europeans leaning on the U.S. to do something about it while resisting us every step of the way. Very 1980s.

What can investors expect?

When things are normal, markets don’t tend to change too dramatically. The U.S. government has returned to a policy of stimulating growth; the changes in the Fannie and Freddie policy are largely driven by a weakening in the housing market, as are the business tax cuts. The immediacy of the debt crisis has waned, and there is no political appetite for continuing to address the problem. Meanwhile, the Fed has gone to great pains not to alarm the market or drive down asset prices.

With no obvious domestic reasons for a market decline on the horizon, the path of least resistance for markets is probably up, at least for a while. The imbalances and problems that I’ve mentioned remain, but they probably won’t hit in the short term.

Unless, of course, there is a zombie apocalypse—and fortunately, the government has a plan for that, too!

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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