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Improvement on the margin









What's more important: the news that third quarter GDP was revised down to only 2.2%, from an original estimate of 3.5%? Or the news that credit spreads continue to decline yet are still at levels that in the past have been consistent with recessionary conditions? I'll take the spread news any day, since it's real-time, and not subject to revision. GDP news is always old and always subject to revision.

The downward revision to GDP amounts to only $46 billion, when you de-annualize the numbers. That's a rounding error these days. Heck, the federal government alone spends that much money in fewer than 5 working days. The important thing about the GDP numbers is the change on the margin. Q1=-6.4%, Q2=-0.7%, Q3=2.2%. Going from minus 6.4% growth to plus 2.2% growth, that's a big deal. And growth in the current quarter is very likely to be higher than 2.2%. Things are improving significantly on the margin.

Declining credit spreads tell us that the outlook for the economy is improving almost daily. Cash flows are stronger, profits are stronger, default risk is declining. Unemployment claims tell us the same thing: fewer people are getting laid off, more people who have been laid off are finding jobs. Rising commodity prices tell us that global growth is improving. Implied volatility in equity options today reached a new low for the year, and that tells us that confidence is returning and uncertainty is diminishing.

The equity market is grudgingly coming to terms with the improvement, but still has along way to go, just as credit spreads have a long way to go before they get back to "normal" levels. The dollar is strengthening on the margin, which means that conditions here are turning out to be better than they world had thought. The dollar is still extremely weak, of course, but on the margin it's getting better. Same can be said for the economy: there is a whole lot of idle capacity out there, and many millions without a job, but things are getting better on the margin.

I don't see a reason for all this improvement to suddenly falter. The news from Washington has been awful all year, and I am just as dismayed as anyone that ObamaCare has advanced as far as it has. But on the margin the clear message is that the people increasingly don't like the far-left agenda. There is a significant amount of resistance brewing out there, and the people will have their revenge in November if the politicians persist in pursuing a wrong-headed policy direction. Even if healthcare passes, it is going to be mired in lawsuits and consitutional challenges for many years.

Obama's greatest legacy might not be the one he dreams of. Instead of permanently and massively expanding the role of the state, he may end up being the catalyst for a new political awakening, and a return to this country's libertarian roots. That would be the most astounding change on the margin imaginable.

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