Finally, a really good, solid datapoint!
Tuesday's Wall Street Journal featured an article on the front place, top, of its Marketplace section with the headline,
"U.S. Firms Eager to Add Foreign Jobs"
The first paragraph said it all,
"U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported."
Further, regarding the other important business input, capital, the article stated,
"The multinational companies, for instance, reduced capital-investment spending in the U.S. at an annual rate of 0.2% in the 2000s and increased it at a 4.0% annual rate abroad. Still, they allocated $2.40 in capital spending in the U.S. for every $1 spent abroad."
In summary, US-based multinational companies cut 864,000 workers in the US and added 2.9 million workers overseas from 1999 to 2009.
If this doesn't explain why the US economy and GDP growth are slowing, with stubborn unemployment, while S&P500 company profits continue to rise, what else do you need?
It also explains why business investment spending, while remaining robust, isn't helping US employment. It's reasonable to expect that much of that new investment spending is being serviced by overseas units and, thus, workers, of US-based companies.
No surprise to me. This is pretty much what I would have expected to see. This is simply the first solid piece of data on the phenomenon which I've seen.
If you heard interviews with the author of Steve Jobs' authorized biography, you may have heard him recount Jobs' frustration with US immigration policy. The story involved Jobs and Google chairman Eric Schmidt, at a White House dinner with its current occupant, explaining that a lack of US engineering talent forced Apple to build a facility in Southeast Asia, where the engineers were available. In addition to the hundreds of engineers, Jobs told the president, Apple also hired thousands of local workers for the production facility.
That, writ large, is what these recent Commerce numbers capture.
Shareholders of these companies should rejoice that the firms are doing what is economically best for them. That includes...ahem.....union members whose pension funds own shares of the S&P500 Index or companies therein.
I wouldn't go pillorying the executives or boards of these companies. They are simply reacting to global demand, costs, tax rates and regulatory environments.
The US Congress and administration should take note. This report illustrates Ricardian comparative advantage economics in action. And that clearly portrays a US labor market that has become overly-regulated, too expensive and difficult to accommodate in exchange for the presumed benefits. Thus, these multinationals find it more cost-effective to service overseas demand with overseas labor, capital equipment and facilities.
Showing posts with label Recession. Show all posts
Showing posts with label Recession. Show all posts
Friday, November 25, 2011
Tuesday, November 08, 2011
Recent Odds & Ends
Barry Knapp, US equity strategy chief of Barclays, was cited in a Wall Street Journal article saying that a European recession won't really affect US firms. Maybe it will trim sales 2%, and that Europe is only 13% of US economic GDP
But later that same day, on Neil Cavuto's Fox News program, another pundit forecast crushing effects on Apple and some other US firms with sizable European operations.
They can't both be right, can they? Being that Knapp is responsible for a sizable equity book, I would doubt he'd be completely candid. That would be rather like yelling "Fire!" in a crowded theater when you are near the doors. So I guess I lean more toward the guy on Cavuto's program.
Ron Baron was on CNBC as they hosted a segment from his investing conference at the Metropolitan Opera of New York. He disclosed that Jon Corzine had solicited his firm to invest in MF Global. In an all too rare example of common sense, Baron declined. His explanation?
First, MF Global's business was a bit too complicated for him to fully understand. Second, what Baron did understand that at 33x leverage, a mere 3% loss would wipe out the firm's equity.
Case closed.
Evidently Baron didn't need the CFTC, SEC or any other regulatory agency to assure him of anything.
But later that same day, on Neil Cavuto's Fox News program, another pundit forecast crushing effects on Apple and some other US firms with sizable European operations.
They can't both be right, can they? Being that Knapp is responsible for a sizable equity book, I would doubt he'd be completely candid. That would be rather like yelling "Fire!" in a crowded theater when you are near the doors. So I guess I lean more toward the guy on Cavuto's program.
Ron Baron was on CNBC as they hosted a segment from his investing conference at the Metropolitan Opera of New York. He disclosed that Jon Corzine had solicited his firm to invest in MF Global. In an all too rare example of common sense, Baron declined. His explanation?
First, MF Global's business was a bit too complicated for him to fully understand. Second, what Baron did understand that at 33x leverage, a mere 3% loss would wipe out the firm's equity.
Case closed.
Evidently Baron didn't need the CFTC, SEC or any other regulatory agency to assure him of anything.
Thursday, November 03, 2011
NBER's Definition of Recession
The US economy is, at best, in the midst of one of the most sluggish expansions in memory. At worst, it's teetering on the edge of a slow slide back into recession- if it ever emerged from the recession declared to have begun in December, 2007.
Thus, it's instructive to revisit the National Bureau of Economic Research's webpages on recession for clarification on how this official umpire of US economic phases defines recession.
"A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.
The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction.
The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production (IP). The Committee's use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs."
On its FAQ page, the NBER further explains,
"Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?
A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP. In the recession beginning in December 2007 and ending in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009. The committee places real Gross Domestic Income on an equal footing with real GDP; real GDI declined for six consecutive quarters in the recent recession.
Q: Why doesn't the committee accept the two-quarter definition?
A: The committee's procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP and real GDI, but use a range of other indicators as well. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in activity." Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in the recessions of 2001 and 2007-2009.
Q: How does the committee weight employment in determining the dates of peaks and troughs?
A. In the 2007-2009 recession, the central indicators–real GDP and real GDI–gave mixed signals about the peak date and a clear signal about the trough date. The peak date at the end of 2007 coincided with the peak in employment. We designated June 2009 as the trough, six months before the trough in employment, which is consistent with earlier trough dates in the NBER business-cycle chronology. In the 2001 recession, we found a clear signal in employment and a mixed one in the various measures of output. Consequently, we picked the peak month based on the clear signal in employment, as well as our consideration of output and other measures. In that cycle, as well, the dating of the trough relied primarily on output measures.
Q: Isn't a recession a period of diminished economic activity?
A: It's more accurate to say that a recession–the way we use the word–is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion. As of September 2010, when we decided that a trough had occurred in June 2009, the economy was still weak, with lingering high unemployment, but had expanded considerably from its trough 15 months earlier.
Q: How do the movements of unemployment claims inform the Bureau's thinking?
A: A bulge in jobless claims usually forecasts declining employment and rising unemployment, but we do not use the initial claims numbers in determining our chronology, partly because of noise in that data series.
Q: How do the cyclical fluctuations in the unemployment rate relate to the NBER business-cycle chronology?
A: The unemployment rate is a trendless indicator that moves in the opposite direction from most other cyclical indicators. Its level in February 1949 was the same 4.7 percent as in November 2007. The NBERhe unemployment rate is a trendless indicator that moves in the opposite direction from most other cyclical indicators. Its level in February 1949 was the same 4.7 percent as in November 2007. The NBER business-cycle chronology considers economic activity, which grows along an upward trend. As a result, the unemployment rate often rises before the peak of economic activity, when activity is still rising but below its normal trend rate of increase. Thus, the unemployment rate is often a leading indicator of the business-cycle peak. For example, the unemployment rate reached its lowest level prior to the December 2007 peak of activity in May 2007 at 4.4 percent and climbed to 5.0 percent by December 2007. On the other hand, the unemployment rate often continues to rise after activity has reached its trough. In this respect, the unemployment rate is a lagging indicator. For example, in the recovery beginning in March 1991, the unemployment rate continued to rise for 15 months after the trough. The lag was 19 months in 2001 to 2003. In the current recovery, the lag was only 4 months, from the trough in activity in June 2009 to the highest level of the unemployment rate in October 2009."
Clear enough?
What is clear is that there is no single definition by the NBER on what constitutes a US recession.
Thus the headline of a Wall Street Journal article in Monday's edition, Slow Recovery Feels Like Recession.
The NBER FAQ page includes the detail that the entity was established in the 1920s. That's relevant because evidently much of its approach dates from an era way before today's globalized supply chains and tightly-interrelated economies. Even when I studied Samuelson's Economics as an undergraduate at Saint Louis University in the late 1970s, the export component of demand (C+I+G+E) was a sort of afterthought. Now, much of the growth in revenues and profits of the S&P500 has been overseas.
What I don't think the NBER ever imagined and, even now, doesn't quite know how to consider, is a scenario, common to the US economy for over two decades now, in which GDP, based on business exports and sales in units located overseas, grows far in excess of US employment. Scenarios in which there is an absolute bifurcation in corporate profits and revenue growth from the fortunes of the US work force.
Thus, since late 2007, we've seen a disparity between business and individual economic fortunes. What the NBER won't call a recession, because, by some technical measures over which it has discretion to choose, the GDP side of the economy is growing, albeit fitfully, while the unemployment picture clearly portrays an economy still in neutral.
I've argued in prior posts that we are in an entirely new economic era with respect to phases like expansion and recession. Global trade has allowed for the growth in overall business activity for companies based in the US, but that growth, thanks to US immigration and tax policies, and comparative costs and productivity levels, is being serviced by overseas employees and operations. Thus, a lowest percentile of every nation's work forces is becoming unproductive on global terms and, thus, unemployable.
Further, in the US, the Fed's wrongheaded low-interest rate, easy money policy under Greenspan and Bernanke led to substantial overinvestment in housing, which, effectively, poured wealth into unaffordable, unnecessary homes. Fannie and Freddie, mandated by an inept Congress, further fueled this mistake with low-cost mortgages to the unqualified.
Is it really a surprise that the US is mired in an unemployment recession and a fitful, sluggish business expansion, after having destroyed so much private wealth in egregious housing investment?
It shouldn't be. In a newly-multilateral global economy where other nations, such as China, didn't make those mistakes, US economic policy mistakes now carry more immediate and significant penalties. I suspect we are now living through our first bout of such a scenario, and it won't be over anytime soon.
Thus, it's instructive to revisit the National Bureau of Economic Research's webpages on recession for clarification on how this official umpire of US economic phases defines recession.
"A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.
The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction.
The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production (IP). The Committee's use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs."
On its FAQ page, the NBER further explains,
"Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?
A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP. In the recession beginning in December 2007 and ending in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009. The committee places real Gross Domestic Income on an equal footing with real GDP; real GDI declined for six consecutive quarters in the recent recession.
Q: Why doesn't the committee accept the two-quarter definition?
A: The committee's procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP and real GDI, but use a range of other indicators as well. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in activity." Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in the recessions of 2001 and 2007-2009.
Q: How does the committee weight employment in determining the dates of peaks and troughs?
A. In the 2007-2009 recession, the central indicators–real GDP and real GDI–gave mixed signals about the peak date and a clear signal about the trough date. The peak date at the end of 2007 coincided with the peak in employment. We designated June 2009 as the trough, six months before the trough in employment, which is consistent with earlier trough dates in the NBER business-cycle chronology. In the 2001 recession, we found a clear signal in employment and a mixed one in the various measures of output. Consequently, we picked the peak month based on the clear signal in employment, as well as our consideration of output and other measures. In that cycle, as well, the dating of the trough relied primarily on output measures.
Q: Isn't a recession a period of diminished economic activity?
A: It's more accurate to say that a recession–the way we use the word–is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion. As of September 2010, when we decided that a trough had occurred in June 2009, the economy was still weak, with lingering high unemployment, but had expanded considerably from its trough 15 months earlier.
Q: How do the movements of unemployment claims inform the Bureau's thinking?
A: A bulge in jobless claims usually forecasts declining employment and rising unemployment, but we do not use the initial claims numbers in determining our chronology, partly because of noise in that data series.
Q: How do the cyclical fluctuations in the unemployment rate relate to the NBER business-cycle chronology?
A: The unemployment rate is a trendless indicator that moves in the opposite direction from most other cyclical indicators. Its level in February 1949 was the same 4.7 percent as in November 2007. The NBERhe unemployment rate is a trendless indicator that moves in the opposite direction from most other cyclical indicators. Its level in February 1949 was the same 4.7 percent as in November 2007. The NBER business-cycle chronology considers economic activity, which grows along an upward trend. As a result, the unemployment rate often rises before the peak of economic activity, when activity is still rising but below its normal trend rate of increase. Thus, the unemployment rate is often a leading indicator of the business-cycle peak. For example, the unemployment rate reached its lowest level prior to the December 2007 peak of activity in May 2007 at 4.4 percent and climbed to 5.0 percent by December 2007. On the other hand, the unemployment rate often continues to rise after activity has reached its trough. In this respect, the unemployment rate is a lagging indicator. For example, in the recovery beginning in March 1991, the unemployment rate continued to rise for 15 months after the trough. The lag was 19 months in 2001 to 2003. In the current recovery, the lag was only 4 months, from the trough in activity in June 2009 to the highest level of the unemployment rate in October 2009."
Clear enough?
What is clear is that there is no single definition by the NBER on what constitutes a US recession.
Thus the headline of a Wall Street Journal article in Monday's edition, Slow Recovery Feels Like Recession.
The NBER FAQ page includes the detail that the entity was established in the 1920s. That's relevant because evidently much of its approach dates from an era way before today's globalized supply chains and tightly-interrelated economies. Even when I studied Samuelson's Economics as an undergraduate at Saint Louis University in the late 1970s, the export component of demand (C+I+G+E) was a sort of afterthought. Now, much of the growth in revenues and profits of the S&P500 has been overseas.
What I don't think the NBER ever imagined and, even now, doesn't quite know how to consider, is a scenario, common to the US economy for over two decades now, in which GDP, based on business exports and sales in units located overseas, grows far in excess of US employment. Scenarios in which there is an absolute bifurcation in corporate profits and revenue growth from the fortunes of the US work force.
Thus, since late 2007, we've seen a disparity between business and individual economic fortunes. What the NBER won't call a recession, because, by some technical measures over which it has discretion to choose, the GDP side of the economy is growing, albeit fitfully, while the unemployment picture clearly portrays an economy still in neutral.
I've argued in prior posts that we are in an entirely new economic era with respect to phases like expansion and recession. Global trade has allowed for the growth in overall business activity for companies based in the US, but that growth, thanks to US immigration and tax policies, and comparative costs and productivity levels, is being serviced by overseas employees and operations. Thus, a lowest percentile of every nation's work forces is becoming unproductive on global terms and, thus, unemployable.
Further, in the US, the Fed's wrongheaded low-interest rate, easy money policy under Greenspan and Bernanke led to substantial overinvestment in housing, which, effectively, poured wealth into unaffordable, unnecessary homes. Fannie and Freddie, mandated by an inept Congress, further fueled this mistake with low-cost mortgages to the unqualified.
Is it really a surprise that the US is mired in an unemployment recession and a fitful, sluggish business expansion, after having destroyed so much private wealth in egregious housing investment?
It shouldn't be. In a newly-multilateral global economy where other nations, such as China, didn't make those mistakes, US economic policy mistakes now carry more immediate and significant penalties. I suspect we are now living through our first bout of such a scenario, and it won't be over anytime soon.
Thursday, October 20, 2011
The Fed's Beige Book et.al.
I wrote this post on Tuesday suggesting there are few reasons to believe that the US economy is in recovery or expansion, and more to expect some sort of continued sluggishness or recession.
Yesterday's Fed Beige book release didn't seem to help matters. Today's Wall Street Journal article on the subject stressed the report's mention of weak economic growth and no good news on jobs. In short, the good news was, well, no really bad news.
On Bloomberg television after the report's release, a Chase economist kept saying there won't be another recession, but that was about it. He seemed mostly focused on that point, while soft-pedaling when pressed by the anchor to discuss any really good economic news from the Fed.
This morning's housing data featured a drop in the sale of existing homes. Meanwhile, Angela Merkel cancelled her big speech to the German legislature on the Euro bailout mess. Grecians continue to riot.
The result in US equity markets? A 1200 S&P, plus or minus a few points depending upon exactly when you look today. Sustained volatility.
Hardly what I'd call the underpinnings of a strong, healthy, vibrant equity market.
Yesterday's Fed Beige book release didn't seem to help matters. Today's Wall Street Journal article on the subject stressed the report's mention of weak economic growth and no good news on jobs. In short, the good news was, well, no really bad news.
On Bloomberg television after the report's release, a Chase economist kept saying there won't be another recession, but that was about it. He seemed mostly focused on that point, while soft-pedaling when pressed by the anchor to discuss any really good economic news from the Fed.
This morning's housing data featured a drop in the sale of existing homes. Meanwhile, Angela Merkel cancelled her big speech to the German legislature on the Euro bailout mess. Grecians continue to riot.
The result in US equity markets? A 1200 S&P, plus or minus a few points depending upon exactly when you look today. Sustained volatility.
Hardly what I'd call the underpinnings of a strong, healthy, vibrant equity market.
Tuesday, October 18, 2011
The US Economy- Are We Really In An Expansion and Not Re-Entering Recession?
Over the past week or so, a number of pundits, including a handful of equity fund investment officers, have appeared on cable business news channels to assert that the US economy is expanding, not entering a recessionary phase. They point to some marginally-lower unemployment filings, or slightly-increased consumer spending.
But I've been noticing some larger trends which would seem to suggest otherwise.
For example, I've seen one or two analyses in the past few months which have clearly illustrated that real US median income has has been flat, or declining, over a decade or more.
We know unemployment is very high. Mort Zuckerman estimated, in a weekend Wall Street Journal edition interview, that real total un- and underemployment is above 19%.
Consumers continue to attempt to deleverage their personal balance sheets of short term liabilities. Meanwhile, values of US housing stock remains significantly lower than it was 3 or 5 years ago. So it would seem both personal incomes and assets are not a source of new spending, nor are liabilities. And employment in gross total terms remains low.
US businesses continue to post profits and spend, but much of those flows relate to international, overseas business volumes, not US-based activity. That's why, like Britain in the 1960s and '70s, US corporate performance doesn't imply that US employment activity will be correlated with said performance.
The US financing sector isn't doing a lot of consumer nor small business lending. Large businesses have atypically large amounts of cash on their balance sheets, in order not to rely on banks and debt markets which dried up in 2008. So that doesn't seem to be a source of growth.
Just where do pundits assume the growth they contend is occurring is sourced?
Do they believe that, in a bifurcating US economy, the still-employed, better-off segments continue to spend, thus offsetting the belt-tightening of the lower-income segments of the population?
I do not have the data, but wonder if the lack of worse US personal economic activity statistics results from those with higher incomes and asset levels masking the declining spending and asset bases of those less fortunate?
Then there's Europe. Just yesterday, Angela Merkel publicly warned that the fix for the continent's debt problems isn't going to come from simply opening up German wallets. Others, notably Kyle Bass, who correctly foresaw the housing bubble's bursting, caution that, along with asset value losses which are certain to come from Europe's financial troubles, will be lower economic activity which will spread back to the US in the form of lower demand and, thus, lower US export levels and resulting recessionary pressures.
I am just not seeing a large silver lining in any of this. Nor, for that matter, much unadulterated, absolutely healthy economic data suggesting a healthy US economic expansion anytime soon.
Bloomberg's Tom Keene had Bob Albertson, a longtime banking analyst, as a guest yesterday on his noontime program. When he queried Albertson about his stance on financial and banking stocks, Albertson of course was bullish. After all, he's a sector analyst. What else can he say?
Then he blustered about banks leading an equity market rally. Then, finally, when Keene asked for a timeframe, Alberstson stalled, finally saying over the next 'year or two or three.'
My God!
The equity market disintegration of 2008 was three years ago this month. Would Albertson have said the same thing three years ago- to just hold on, eventually the market levels would recover?
I continue to view the optimism of pundits as book-talking and self-interested calming of investor nerves. A broad, deep array of supporting economic data, and positive trends in Europe and the US regarding financial sector issues, remain missing.
But I've been noticing some larger trends which would seem to suggest otherwise.
For example, I've seen one or two analyses in the past few months which have clearly illustrated that real US median income has has been flat, or declining, over a decade or more.
We know unemployment is very high. Mort Zuckerman estimated, in a weekend Wall Street Journal edition interview, that real total un- and underemployment is above 19%.
Consumers continue to attempt to deleverage their personal balance sheets of short term liabilities. Meanwhile, values of US housing stock remains significantly lower than it was 3 or 5 years ago. So it would seem both personal incomes and assets are not a source of new spending, nor are liabilities. And employment in gross total terms remains low.
US businesses continue to post profits and spend, but much of those flows relate to international, overseas business volumes, not US-based activity. That's why, like Britain in the 1960s and '70s, US corporate performance doesn't imply that US employment activity will be correlated with said performance.
The US financing sector isn't doing a lot of consumer nor small business lending. Large businesses have atypically large amounts of cash on their balance sheets, in order not to rely on banks and debt markets which dried up in 2008. So that doesn't seem to be a source of growth.
Just where do pundits assume the growth they contend is occurring is sourced?
Do they believe that, in a bifurcating US economy, the still-employed, better-off segments continue to spend, thus offsetting the belt-tightening of the lower-income segments of the population?
I do not have the data, but wonder if the lack of worse US personal economic activity statistics results from those with higher incomes and asset levels masking the declining spending and asset bases of those less fortunate?
Then there's Europe. Just yesterday, Angela Merkel publicly warned that the fix for the continent's debt problems isn't going to come from simply opening up German wallets. Others, notably Kyle Bass, who correctly foresaw the housing bubble's bursting, caution that, along with asset value losses which are certain to come from Europe's financial troubles, will be lower economic activity which will spread back to the US in the form of lower demand and, thus, lower US export levels and resulting recessionary pressures.
I am just not seeing a large silver lining in any of this. Nor, for that matter, much unadulterated, absolutely healthy economic data suggesting a healthy US economic expansion anytime soon.
Bloomberg's Tom Keene had Bob Albertson, a longtime banking analyst, as a guest yesterday on his noontime program. When he queried Albertson about his stance on financial and banking stocks, Albertson of course was bullish. After all, he's a sector analyst. What else can he say?
Then he blustered about banks leading an equity market rally. Then, finally, when Keene asked for a timeframe, Alberstson stalled, finally saying over the next 'year or two or three.'
My God!
The equity market disintegration of 2008 was three years ago this month. Would Albertson have said the same thing three years ago- to just hold on, eventually the market levels would recover?
I continue to view the optimism of pundits as book-talking and self-interested calming of investor nerves. A broad, deep array of supporting economic data, and positive trends in Europe and the US regarding financial sector issues, remain missing.
Tuesday, October 11, 2011
Don't Believe Everything You See On Cable Business Channels
Neil Cavuto hosts a 4PM weekday program on Fox News which he tries to make into a blend of political and business news, typically beginning the hour by discussing the US equity market performance of the day.
Last week, I caught a few minutes of a misleading and, frankly, just wrong-headed segment in which a guest contended that Costco will be losing business by raising its membership fee.
I forget the woman's name, but she had an axe to grind against the warehouse discount store chain. All the woman could talk about was that Costco was raising its annual membership fee by about 10%, so she alleged, to around or just below $55. For the record, I know Costco has raised my annual fee once since I joined over four years ago. It was $50 when I joined, and I just wrote them a check for $53.50 last month.
In the past year, I realized that there is almost nothing which I used to buy at my former usual grocers, Kings and Stop 'n Shop, that I cannot also buy at Costco for roughly half the price. The biggest surprise was how much I save on staples- milk, juice, lettuce, chicken breasts, cereal, salad dressings and fruit. I now buy a package of six romaine lettuce heads for about $5, or what two heads cost at Kings.
I probably visit Costco once per week, since it's located within a couple of miles from my fitness club. My actual visits per week probably average 1.3.
While there, usually after playing squash and working out, I usually eat a light dinner for a laughably small sum. It's hard to spend more than $3.50 to eat dinner there, and the choices include a surprisingly healthy array of choices.
While having dinner and reading the editorials in the Wall Street Journal, I also watch the parade of shoppers checking out and leaving the store. I'd say roughly half are families or a couple with a very full shopping cart. Just from my experience behind people buying large amounts of food, and my own bills, I'd estimate that a full cart can easily represent $200-300 worth of groceries. Multiply that by 50 weeks, and you have at least $12,500 annual sales for a family that shops at Costco. I'm reasonably sure that's a low estimate.
On that base, a $5 annual fee increase is 4 hundredths of a percent! Even for me, it would be only about a tenth of a percentage point.
Yet the woman whom Cavuto had as a guest railed against Costco needlessly increasing its fee, insisting that many families would bolt the warehouse chain to return to their local grocery stores.
To use a phrase, 'in a pig's eye!'
Has this woman ever seen families carting out a 40" flat panel plasma TV? A workbench, chair or bicycle? You can't believe the bargains to be had on high-end electronics- camera, TVs, gaming accessories, laptops and tablets. Microwave ovens, office furniture, and medium-sized appliances. All half-price.
You can't seriously believe anyone who uses Costco frequently would change stores over much less than a doubling of the membership fee. The economics are simply too compelling.
Yet Cavuto himself was unable to do this math on air and challenge the woman's assertions. It was really pathetic. She was a moron clinging to a totally indefensible viewpoint, while Cavuto just sat there and expressed dumbfounded surprise, without asking the woman why such a small fee increase would matter to people spending thousands of dollars per year at Costco.
Last week, I caught a few minutes of a misleading and, frankly, just wrong-headed segment in which a guest contended that Costco will be losing business by raising its membership fee.
I forget the woman's name, but she had an axe to grind against the warehouse discount store chain. All the woman could talk about was that Costco was raising its annual membership fee by about 10%, so she alleged, to around or just below $55. For the record, I know Costco has raised my annual fee once since I joined over four years ago. It was $50 when I joined, and I just wrote them a check for $53.50 last month.
In the past year, I realized that there is almost nothing which I used to buy at my former usual grocers, Kings and Stop 'n Shop, that I cannot also buy at Costco for roughly half the price. The biggest surprise was how much I save on staples- milk, juice, lettuce, chicken breasts, cereal, salad dressings and fruit. I now buy a package of six romaine lettuce heads for about $5, or what two heads cost at Kings.
I probably visit Costco once per week, since it's located within a couple of miles from my fitness club. My actual visits per week probably average 1.3.
While there, usually after playing squash and working out, I usually eat a light dinner for a laughably small sum. It's hard to spend more than $3.50 to eat dinner there, and the choices include a surprisingly healthy array of choices.
While having dinner and reading the editorials in the Wall Street Journal, I also watch the parade of shoppers checking out and leaving the store. I'd say roughly half are families or a couple with a very full shopping cart. Just from my experience behind people buying large amounts of food, and my own bills, I'd estimate that a full cart can easily represent $200-300 worth of groceries. Multiply that by 50 weeks, and you have at least $12,500 annual sales for a family that shops at Costco. I'm reasonably sure that's a low estimate.
On that base, a $5 annual fee increase is 4 hundredths of a percent! Even for me, it would be only about a tenth of a percentage point.
Yet the woman whom Cavuto had as a guest railed against Costco needlessly increasing its fee, insisting that many families would bolt the warehouse chain to return to their local grocery stores.
To use a phrase, 'in a pig's eye!'
Has this woman ever seen families carting out a 40" flat panel plasma TV? A workbench, chair or bicycle? You can't believe the bargains to be had on high-end electronics- camera, TVs, gaming accessories, laptops and tablets. Microwave ovens, office furniture, and medium-sized appliances. All half-price.
You can't seriously believe anyone who uses Costco frequently would change stores over much less than a doubling of the membership fee. The economics are simply too compelling.
Yet Cavuto himself was unable to do this math on air and challenge the woman's assertions. It was really pathetic. She was a moron clinging to a totally indefensible viewpoint, while Cavuto just sat there and expressed dumbfounded surprise, without asking the woman why such a small fee increase would matter to people spending thousands of dollars per year at Costco.
Tuesday, September 06, 2011
Equities & Friday's Jobs Numbers
I was away for most of last week, having set two posts to auto-publish. The post for 31 August failed, per Blogger's frequent problems with scheduled posts, so I manually published it this morning.
When I began to clear my inbox over the weekend, I noted the precipitous fall in the S&P500 on Friday after fairly uneventful days from Tuesday through Thursday. Guessing I'd read of some significant event or news for that day, I was not surprised in the least to learn of the jobs report showing no net employment increase for August. The net result for the S&P for last week was to end essentially flat.
Happily, when I checked the values of the equity portfolios selected by my proprietary quantitative process, I saw that they continue to average more than 10 percentage points of total return above the S&P returns for the respective matching timeframes. For 2011, at Friday's close, the index had lost 6.65%. As of late morning today, it's lost more than an additional 2%.
The pundits and co-anchors on CNBC and Bloomberg all have 'this might be a rerun of 2008' looks on their faces and distress in the tones of their voices. Finally, after many months of administration attempts to make mountains out of pathetically weak economic data, said data is looking decidedly worse, and these financial news network on-air staff can't hide it anymore.
Between continued investor nervousness about European debt problems, and their hyper-sensitivity to bad US economic data, it probably won't take much non-good news during September to drive equity markets down even further.
When I began to clear my inbox over the weekend, I noted the precipitous fall in the S&P500 on Friday after fairly uneventful days from Tuesday through Thursday. Guessing I'd read of some significant event or news for that day, I was not surprised in the least to learn of the jobs report showing no net employment increase for August. The net result for the S&P for last week was to end essentially flat.
Happily, when I checked the values of the equity portfolios selected by my proprietary quantitative process, I saw that they continue to average more than 10 percentage points of total return above the S&P returns for the respective matching timeframes. For 2011, at Friday's close, the index had lost 6.65%. As of late morning today, it's lost more than an additional 2%.
The pundits and co-anchors on CNBC and Bloomberg all have 'this might be a rerun of 2008' looks on their faces and distress in the tones of their voices. Finally, after many months of administration attempts to make mountains out of pathetically weak economic data, said data is looking decidedly worse, and these financial news network on-air staff can't hide it anymore.
Between continued investor nervousness about European debt problems, and their hyper-sensitivity to bad US economic data, it probably won't take much non-good news during September to drive equity markets down even further.
Monday, August 08, 2011
Economics, Cycles & Politics
As I listened to this past Friday's dismal job growth numbers and persistent high unemployment, coupled with the prior Friday's dismal GDP growth numbers, it occurred to me that, due to the misleading mythology allowed to grow up around FDR's presidency, the US now seems destined to borrow and spend its way to ruin thanks to empirically discredited Keynesian economic policies.
Let's go back to basic macroeconomics. Before Keynes.
Economies move in cycles. If there were no presumption on the part of governments to attempt to repeal the laws of economic cycles, then we'd see what was prevalent in pre-1930s America and elsewhere. Expansions eventually slow as Samuelson's accelerator-multiplier (see also here) theory kicks in,
"Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.
Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.
Instead of 10% more materials each year to make my products, this year, I need only 5% more.
My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.
While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.
Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers."
Contraction follows expansion, then recession, followed by recovery and, subsequently, expansion.
Before America had the world's reserve currency, was the free world's economic hegemonist, and could basically print or borrow dollars at will, that's how most economies behaved.
Yes, you will now hear Keynesians decry over-savings, or the paradox of thrift, as ex-PIMCO managing director Paul McCulley did in a Bloomberg television interview on Friday afternoon. He now looks like some wild-haired ape-man, with an even more virulent streak of Keynesianism, now that he has no responsibility to PIMCO to appear the least bit economically sane.
But those arguments only appeared as Keynes wrote the General Theory and mistakenly believed that pump-priming, deficit spending, call it what you will, could actually and benevolently affect long term economic conditions positively.
We know now, decades later, that Keynes' theory was simply a sop to human desire for immediate gratification, while ignoring the very real longer-term consequences of debt, higher taxes, and reduced personal economic freedoms.
The linked post from last week, discussing the true nature of WWII as a time of immense savings and lowered consumption, setting the stage of the US economy's rapid growth in the 1950s, puts the lie to McCulley's contention regarding the so-called paradox of thrift.
The reality is that savings are collected and invested, eventually forming capital and underpinning healthy economic growth in the private sector, when natural economic forces are allowed to operate.
I believe that, much like the current mistaken belief by many that cutting social welfare programs like Social Security, Medicare, or Medicaid, constitutes a broken societal promise, the real question is whether the cure is worse than the disease.
Those social programs will never operate in a sustained fashion, designed, as they all were, with fatal flaws.
So, too, does Keynesian theory on government stimulus exist in a sort of fantasy world of arithmetic, rather than human, behavior. The reality is that the forced spending doesn't create lasting employment or economically-viable industries, but it leaves very real debt and a need for future spending reductions or increased taxes.
What was wrong with simply allowing natural economic cycles to operate in the first place, if the policies which economists have been able to develop as a method of repealing the laws of economic cycles bring side-effects which have ultimately proven worse than the original condition of naturally-occurring phases in economic cycles?
If the US federal government didn't have the monetary power of the world's reserve curency, combined with politicians of both parties who, once elected President, Senator, Representative or Fed Chairman, work furiously to retain those positions, do you really think we'd seriously be spending trillions of borrowed money to try to remove recessions and contractions from our economic cycles?
This folly has been primarly a politically-generated error. The health of the American economy doesn't require Keynesian stimulus spending- only the political careers of federal elected officials.
Let's go back to basic macroeconomics. Before Keynes.
Economies move in cycles. If there were no presumption on the part of governments to attempt to repeal the laws of economic cycles, then we'd see what was prevalent in pre-1930s America and elsewhere. Expansions eventually slow as Samuelson's accelerator-multiplier (see also here) theory kicks in,
"Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.
Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.
Instead of 10% more materials each year to make my products, this year, I need only 5% more.
My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.
While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.
Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers."
Contraction follows expansion, then recession, followed by recovery and, subsequently, expansion.
Before America had the world's reserve currency, was the free world's economic hegemonist, and could basically print or borrow dollars at will, that's how most economies behaved.
Yes, you will now hear Keynesians decry over-savings, or the paradox of thrift, as ex-PIMCO managing director Paul McCulley did in a Bloomberg television interview on Friday afternoon. He now looks like some wild-haired ape-man, with an even more virulent streak of Keynesianism, now that he has no responsibility to PIMCO to appear the least bit economically sane.
But those arguments only appeared as Keynes wrote the General Theory and mistakenly believed that pump-priming, deficit spending, call it what you will, could actually and benevolently affect long term economic conditions positively.
We know now, decades later, that Keynes' theory was simply a sop to human desire for immediate gratification, while ignoring the very real longer-term consequences of debt, higher taxes, and reduced personal economic freedoms.
The linked post from last week, discussing the true nature of WWII as a time of immense savings and lowered consumption, setting the stage of the US economy's rapid growth in the 1950s, puts the lie to McCulley's contention regarding the so-called paradox of thrift.
The reality is that savings are collected and invested, eventually forming capital and underpinning healthy economic growth in the private sector, when natural economic forces are allowed to operate.
I believe that, much like the current mistaken belief by many that cutting social welfare programs like Social Security, Medicare, or Medicaid, constitutes a broken societal promise, the real question is whether the cure is worse than the disease.
Those social programs will never operate in a sustained fashion, designed, as they all were, with fatal flaws.
So, too, does Keynesian theory on government stimulus exist in a sort of fantasy world of arithmetic, rather than human, behavior. The reality is that the forced spending doesn't create lasting employment or economically-viable industries, but it leaves very real debt and a need for future spending reductions or increased taxes.
What was wrong with simply allowing natural economic cycles to operate in the first place, if the policies which economists have been able to develop as a method of repealing the laws of economic cycles bring side-effects which have ultimately proven worse than the original condition of naturally-occurring phases in economic cycles?
If the US federal government didn't have the monetary power of the world's reserve curency, combined with politicians of both parties who, once elected President, Senator, Representative or Fed Chairman, work furiously to retain those positions, do you really think we'd seriously be spending trillions of borrowed money to try to remove recessions and contractions from our economic cycles?
This folly has been primarly a politically-generated error. The health of the American economy doesn't require Keynesian stimulus spending- only the political careers of federal elected officials.
Monday, August 01, 2011
Friday's GDP Numbers
The much-anticipated US government's formal news release of GDP for Q2 and revised Q1 came with disappointing data:
"Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent."
And on prices and spending,
"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first.
Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. Services increased 0.8 percent, the same increase as in the first."
Over on Bloomberg television, Tom Keene said he thought the Q1 revision was a typo when he first saw it. The GDP data provided an explanation and, probably, a good reason for the fifth S&P500 down day last week. From 1345.02 the prior Friday to 1292 and change on the last trading day of July, the equity index reflected ongoing US broad economic difficulties.
Recall, if you will, the administration's robust 4% annual GDP wishes-as-forecast. We're a long, long way from that.
While the government debt limit and spending cut drama continues to play out, one would be forgiven for seeing the GDP, price and weakened Q2 spending data as more lasting, deeper reason to doubt whether the US really ever exited from the recession begun in 2007.
Still, this need not mean a plunging S&P500. The larger global US companies comprising the index continue, in the short run, to profit from economic growth elsewhere in the world, with more favorable business conditions abroad than at home.
Not that even this will last indefinitely. But until deleveraging makes more progress in the form of reduced expecatations of government pensions and benefits globally, and subsequent higher personal savings rates and lower consumption, US equities may remain attractive.
"Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent."
And on prices and spending,
"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first.
Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. Services increased 0.8 percent, the same increase as in the first."
Over on Bloomberg television, Tom Keene said he thought the Q1 revision was a typo when he first saw it. The GDP data provided an explanation and, probably, a good reason for the fifth S&P500 down day last week. From 1345.02 the prior Friday to 1292 and change on the last trading day of July, the equity index reflected ongoing US broad economic difficulties.
Recall, if you will, the administration's robust 4% annual GDP wishes-as-forecast. We're a long, long way from that.
While the government debt limit and spending cut drama continues to play out, one would be forgiven for seeing the GDP, price and weakened Q2 spending data as more lasting, deeper reason to doubt whether the US really ever exited from the recession begun in 2007.
Still, this need not mean a plunging S&P500. The larger global US companies comprising the index continue, in the short run, to profit from economic growth elsewhere in the world, with more favorable business conditions abroad than at home.
Not that even this will last indefinitely. But until deleveraging makes more progress in the form of reduced expecatations of government pensions and benefits globally, and subsequent higher personal savings rates and lower consumption, US equities may remain attractive.
Friday, June 10, 2011
Economic Denial
Despite recent anemic GDP and net job growth, the administration uses terms like "bump in the road" and "a blip" to describe the continuing lack of robust performance of the US economy.
I found the president's remarks concerning the economy while at a press conference with German PM Andrea Merkel to be particularly galling and condescending.
For a guy with little background in any productive line of work, to use the term very loosely, and absolutely no knowledge of economics, he's hardly one to set expectations or characterize the failure of his 2 1/2 years of expensive, failed Keynesian policies.
Then, yesterday, Robert Schiller warned that average housing prices could fall by another 25% in the next 4-5 years.
I don't think "bump in the road" or "blip" describes what the effects of that prediction coming true will be.
I found the president's remarks concerning the economy while at a press conference with German PM Andrea Merkel to be particularly galling and condescending.
For a guy with little background in any productive line of work, to use the term very loosely, and absolutely no knowledge of economics, he's hardly one to set expectations or characterize the failure of his 2 1/2 years of expensive, failed Keynesian policies.
Then, yesterday, Robert Schiller warned that average housing prices could fall by another 25% in the next 4-5 years.
I don't think "bump in the road" or "blip" describes what the effects of that prediction coming true will be.
Wednesday, May 25, 2011
Horrific Housing Data Predicts Continued Economic Sluggishness
It's no secret that the housing sector has been a drag on the US economic recovery. But different pundits are putting different spins on the recent data showing flat April home sales at, to quote Kelly Evans from the Wall Street Journal, "a seasonally adjusted annual pace of 300,000."
Evans compared current sales to the past with this chilling passage,
"Unless sales pick up materially this year, 2011 will mark a sixth year in a row of new-home-sales declines and the fewest sales since records began being kept in 1963. One statistic tells the story: The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the population today is nearly two-thirds bigger."
According to Evans, "housing is the business cycle." She concludes her Ahead of the Tape column by contending,
"We are stuck today, as in the 1930s, in a household recession triggered by excessive debt levels. These, unfortunately, can take many years- not months- to fix."
It's now almost ten full years since 9/11, when Alan Greenspan lowered rates and kicked off the post-technology equity bubble mortgage finance orgy. What is so troubling is that it apparently never occurred to Greenspan, nor his successor, current Fed chairman Bernanke, that allowing the housing sector to create its own asset bubble would be such a crippling, lasting mistake.
Whereas the technology company bubble involved much intangible value which rapidly grew, then shrank, in web-based business, the housing sector bubble left real physical assets that have overhung the market in ways not seen for literally decades in the US economy's recession-expansion dynamic.
Reading Evans' column gives one pause to wonder how, if the last two Fed chairman could make such a huge, fundamental mistake with their gross mismanagement of the money supply and associated interest rates, just why are we so afraid of significant change at the Fed. Perhaps in the direction of Friedman's automated monetary policy ideas?
Surely before 2000, the Fed contained at least a few capable staff economists who knew of the historic role a vibrant, growing housing sector had in driving the US economy. Were they really completely blind to how the easy money policies of Greenspan were building a large pool of unaffordable housing? Even during the bubble, the Wall Street Journal and CNBC regularly featured pundits who pointed to unaffordable ratios of mean income/mean home price and their changes.
Now that we're saddled with the outcome of the housing-fueled financial mess and its effect on the economy, as Evans notes, we have both physical housing assets and excessive household debt related to it. Plus the continuing depressive effects of soon-to-be-foreclosed houses on the values of currently-occupied homes on which mortgages are still being paid.
While some pundits have suggested literally plowing unoccupied housing under, to magically reduce their affect on the value of existing homes, some entities will have to record those permanent losses. Equity will be destroyed.
Is that really a cure for what ails the US economy now? Is it really intelligent to simply zero out even more housing value on bank balance sheets? Or transfer the losses to government balance sheets?
Meanwhile, recent housing news is abuzz with forecasts of more price declines, perhaps fueling even more foreclosures. At this rate, who in their right mind would borrow- or lend- to build a new home?
I can't help but think that most of this mess, including the cocaine-like effects of QE2, are just more symptoms of our inability to let market forces work on problems like the housing bubble.
Michael Steinhardt opined as much in a March, 2009 appearance on CNBC. I wrote at the time of Steinhardt's observations, including these two,
"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.
-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels."
Kelly Evans' focus on the horrific current housing statistics seem to reinforce Steinhardt's thoughts of over two years ago. Unemployment and housing sector activity are certainly related. So continued severe weakness in the latter is continuing to have an impact on the former. And there seems, as Evans contends, to be no simple nor quick resolution.
Evans compared current sales to the past with this chilling passage,
"Unless sales pick up materially this year, 2011 will mark a sixth year in a row of new-home-sales declines and the fewest sales since records began being kept in 1963. One statistic tells the story: The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the population today is nearly two-thirds bigger."
According to Evans, "housing is the business cycle." She concludes her Ahead of the Tape column by contending,
"We are stuck today, as in the 1930s, in a household recession triggered by excessive debt levels. These, unfortunately, can take many years- not months- to fix."
It's now almost ten full years since 9/11, when Alan Greenspan lowered rates and kicked off the post-technology equity bubble mortgage finance orgy. What is so troubling is that it apparently never occurred to Greenspan, nor his successor, current Fed chairman Bernanke, that allowing the housing sector to create its own asset bubble would be such a crippling, lasting mistake.
Whereas the technology company bubble involved much intangible value which rapidly grew, then shrank, in web-based business, the housing sector bubble left real physical assets that have overhung the market in ways not seen for literally decades in the US economy's recession-expansion dynamic.
Reading Evans' column gives one pause to wonder how, if the last two Fed chairman could make such a huge, fundamental mistake with their gross mismanagement of the money supply and associated interest rates, just why are we so afraid of significant change at the Fed. Perhaps in the direction of Friedman's automated monetary policy ideas?
Surely before 2000, the Fed contained at least a few capable staff economists who knew of the historic role a vibrant, growing housing sector had in driving the US economy. Were they really completely blind to how the easy money policies of Greenspan were building a large pool of unaffordable housing? Even during the bubble, the Wall Street Journal and CNBC regularly featured pundits who pointed to unaffordable ratios of mean income/mean home price and their changes.
Now that we're saddled with the outcome of the housing-fueled financial mess and its effect on the economy, as Evans notes, we have both physical housing assets and excessive household debt related to it. Plus the continuing depressive effects of soon-to-be-foreclosed houses on the values of currently-occupied homes on which mortgages are still being paid.
While some pundits have suggested literally plowing unoccupied housing under, to magically reduce their affect on the value of existing homes, some entities will have to record those permanent losses. Equity will be destroyed.
Is that really a cure for what ails the US economy now? Is it really intelligent to simply zero out even more housing value on bank balance sheets? Or transfer the losses to government balance sheets?
Meanwhile, recent housing news is abuzz with forecasts of more price declines, perhaps fueling even more foreclosures. At this rate, who in their right mind would borrow- or lend- to build a new home?
I can't help but think that most of this mess, including the cocaine-like effects of QE2, are just more symptoms of our inability to let market forces work on problems like the housing bubble.
Michael Steinhardt opined as much in a March, 2009 appearance on CNBC. I wrote at the time of Steinhardt's observations, including these two,
"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.
-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels."
Kelly Evans' focus on the horrific current housing statistics seem to reinforce Steinhardt's thoughts of over two years ago. Unemployment and housing sector activity are certainly related. So continued severe weakness in the latter is continuing to have an impact on the former. And there seems, as Evans contends, to be no simple nor quick resolution.
Monday, April 04, 2011
Research On Oil Shocks & The US Economy
Don Luskin wrote an interesting editorial in last Tuesday's Wall Street Journal which contained some valuable empirical information on the effects of oil prices on US economic activity.
One of the pieces of research cited by Luskin "suggests that oil prices imperil the economy when they reach a new three-year high."
Another "says the overall economy is threatened when the 12-month average oil price exceeds the year-ago 12-month average price by more than half. Below those levels consumer and investor expectations aren't sufficiently disrupted to make a difference."
Luskin then observed that "both conditions are very far from being triggered at today's prices."
I don't follow the oil markets specifically, so I'll have to take Luskin's word for that conclusion. After all, there are various grades of oil priced at various places, and Cushing, Oklahoma, the standard US pricing nexus, has, I am aware, some capacity issues which can distort prices there.
However, it's pretty clear that today's trailing 12-month average price of oil isn't very high above the prior year-ago 12-month average, although, just typing that reminds me of how much specific price information is required for that determination. Information I don't typically have at my fingertips.
But I do find coherence between the oil effect researchers' approaches to comparing recent prices with year-ago averages or prior peak prices. I've observed similar equity-market-related effects using not entirely dissimilar lagged point-in-time average comparisons. The notion of modeling human behavior regarding surprise or accommodation is not new, and it makes a lot of sense. If changes aren't too drastic over a year's time, people can often adjust to them and, thus, attenuate their impact.
Luskin goes on to cite some more interesting statistics which build upon the US economy's improved energy efficiencies since the first Arab oil embargo of 1973-74. He writes,
"It may come as a surprise to many, but today in the U.S. we're consuming the same amount of crude oil that we did 12 years ago and real output is more than 25% higher. For all the talk of our being the planet's most villainous energy hog, we've become remarkably oil efficient."
Wow. Imagine that! No subsidies for cutting oil usage, and it's become more efficient all on its own. Why, that sounds like a market that responds to price signals, economizing on that which is becoming more expensive, doesn't it?
Maybe oil's price trend and the uncertainty of its level has affected US oil efficiency on its own, without the dubiously-effective subsidies to wind, solar and other ostensible replacement sources.
It is a constant source of comforting amazement to me that US energy efficiency improves over time, on its own, while critics point to simpler, less-useful numbers such as total oil usage. After all, if you have a large economy that creates much economic value, it will tend to use lots of inputs to do so. That doesn't make it bad nor inefficient solely on the basis of scale.
Luskin's piece is valuable, therefore, for two reasons. He highlights some important empirical research suggesting what sorts of oil price increases will be necessary to really cripple the US economy due to consumer behavioral changes, and reminds us that, meanwhile, the country's natural economic behavior has increased the efficiency with which we use this expensive energy input.
One of the pieces of research cited by Luskin "suggests that oil prices imperil the economy when they reach a new three-year high."
Another "says the overall economy is threatened when the 12-month average oil price exceeds the year-ago 12-month average price by more than half. Below those levels consumer and investor expectations aren't sufficiently disrupted to make a difference."
Luskin then observed that "both conditions are very far from being triggered at today's prices."
I don't follow the oil markets specifically, so I'll have to take Luskin's word for that conclusion. After all, there are various grades of oil priced at various places, and Cushing, Oklahoma, the standard US pricing nexus, has, I am aware, some capacity issues which can distort prices there.
However, it's pretty clear that today's trailing 12-month average price of oil isn't very high above the prior year-ago 12-month average, although, just typing that reminds me of how much specific price information is required for that determination. Information I don't typically have at my fingertips.
But I do find coherence between the oil effect researchers' approaches to comparing recent prices with year-ago averages or prior peak prices. I've observed similar equity-market-related effects using not entirely dissimilar lagged point-in-time average comparisons. The notion of modeling human behavior regarding surprise or accommodation is not new, and it makes a lot of sense. If changes aren't too drastic over a year's time, people can often adjust to them and, thus, attenuate their impact.
Luskin goes on to cite some more interesting statistics which build upon the US economy's improved energy efficiencies since the first Arab oil embargo of 1973-74. He writes,
"It may come as a surprise to many, but today in the U.S. we're consuming the same amount of crude oil that we did 12 years ago and real output is more than 25% higher. For all the talk of our being the planet's most villainous energy hog, we've become remarkably oil efficient."
Wow. Imagine that! No subsidies for cutting oil usage, and it's become more efficient all on its own. Why, that sounds like a market that responds to price signals, economizing on that which is becoming more expensive, doesn't it?
Maybe oil's price trend and the uncertainty of its level has affected US oil efficiency on its own, without the dubiously-effective subsidies to wind, solar and other ostensible replacement sources.
It is a constant source of comforting amazement to me that US energy efficiency improves over time, on its own, while critics point to simpler, less-useful numbers such as total oil usage. After all, if you have a large economy that creates much economic value, it will tend to use lots of inputs to do so. That doesn't make it bad nor inefficient solely on the basis of scale.
Luskin's piece is valuable, therefore, for two reasons. He highlights some important empirical research suggesting what sorts of oil price increases will be necessary to really cripple the US economy due to consumer behavioral changes, and reminds us that, meanwhile, the country's natural economic behavior has increased the efficiency with which we use this expensive energy input.
Thursday, March 24, 2011
Mort Zuckerman On The Anemic Recovery
Mort Zuckerman wrote a provocative editorial in last Thursday's Wall Street Journal concerning the anemic recovery in the US. He echoed some of my concerns, but provided interesting metrics to substantiate them.
For example, consider this passage,
"Quite simply, it is because households are still carrying far too much debt on their balance sheets. Relative to income, debt today is approximately twice as high for families as it was in the 1980s. Total borrowing in relation to disposable, personal after-tax income leaped to approximately 136% in the first quarter of 2008 from 60% in the early 1980s before it began to recede. It has now declined to 117% of income compared to the pre- bubble norm of 70%. To return to that level, debt would have to be reduced by another $6 trillion. Similarly, the debt-to-asset ratio in relation to household assets is currently 20%, but the pre-bubble norm was 12.5%. The deleveraging process still has a long ways to go.
As more U.S. households pay down their debt, the slowdown in consumer spending will continue. The savings rate, which had averaged 8.6% during the 1980s and 5.5% in the 1990s, dropped to an alarming 2.8% in the 2000s. No longer are households engaging in mortgage equity cash-outs to the tune of over $80 billion per quarter, as they did in 2006. Cash-out refinancing today has dropped by 90%, contracting the available funds that helped power the pre-2007 spending binge."
In short, Zuckerman cites the data which explain why even the very slow job growth that seems to be fretfully emerging is not going to be sufficient to cure our ills. We're experiencing and witnessing continuing consumer de-leveraging after a decade of financial decline.
If you look closely at these comparative statistics, it describes how much different the decades of the 1990s and 2000s were from the 1980s. That earliest decade was, at the time, considered one of prosperity. Yet, in terms of personal financial balance sheets, it was relatively restrained.
From the perspective Zuckerman provides, the last twenty years have truly been an aberration.
Zuckerman continues by observing,
"Not surprisingly, middle-class Americans are growing increasingly leery of debt. This trend will continue as more families realize their retirement nest egg is going to be a whole lot smaller than they expected. Credit cards provide a marker. In a survey taken towards the end of last year by Javelin Strategy & Research, only 45% of households used credit cards in 2010, compared to 56% in 2009, and 87% in 2007.
Virtually every index of consumer sentiment supports this sense of consumer restraint. In a recent poll taken by the Pew Research Center, 71% of American consumers say they are buying less expensive brands, 57% say they have trimmed or eliminated vacations, 11% have postponed marriage or children, and 9% have moved in with their families, reducing spending on alcoholic beverages, clothing and restaurants. In other words, roughly 25 million unemployed or partially unemployed Americans are focusing on basic necessities. They make up a part of the 42 million Americans on food stamps.
Quite simply, American households are seeking to become net savers, not net borrowers. This is hardly surprising when real median household incomes are down over 4% from the 2000-2009 decade, according to recent research conducted by Mr. Rosenberg at Gluskin Sheff. Net worth has declined by more than $100,000 for the average household compared to just three years ago, and total household net worth is $12 trillion lower today than at the pre-recession peak—an unprecedented decline of 18.5% over three years. The bulk of this loss comes from diminished home equity, and with more than six million homes in inventory or in foreclosure, prices have been declining again for the past six months."
Here, Zuckerman has provided some of the income and spending details to identify why and how the consumer balance sheet changes he noted in the previous passage are occurring. It's stunning stuff, is it not? These are the sorts of behaviors probably last experienced forty years ago, during the Carter-era stagflation. That is, American families making sizable lifestyle changes in order to survive,
"In short, the triple whammy of weak consumer sales, a weak housing market, and a deeply anemic job market is still very much with us. There are no quick fixes to the post-bubble credit collapse. The painful process of deleveraging is far from over. Current debt loads are not sustainable either by incomes or asset values, which are falling.
That's why our economic pulse is so weak. Real GDP growth is less than half of what one would ordinarily expect to see coming out of such a deep downturn. And there has been virtually no recovery at all with respect to housing, income levels and employment."
So there you have it in a nutshell. Consumer deleveraging, by the numbers. The related income and expense consequences. I think the data are convincing and compelling. We have a signficant shift in consumer economic and financial behaviors.
In conclusion, Zuckerman wrote,
"The government's February jobs report reaped a slew of cheerful headlines. But much of the bounce came in construction, where workers were kept idle by January's snowfalls. Job gains for the past three months averaged just 135,000—we need 150,000 a month just to keep pace with population. And government figures don't take into account the two million plus discouraged workers who've dropped out of the labor force over the past year and a half and are still unemployed. If counted, the jobless rate would have been 11.5% in February."
I don't particularly agree with his final comments suggesting another federal stimulus, whether monetary or fiscal. But his analysis of the current US economic situation is, I believe, correct. The trouble is, many want government to do something. Nobody seems to be capable anymore of simply accepting the pain and consequences of prior economic mistakes.
But now, that's probably what is necessary for the US economy to fully recover to its potential.
For example, consider this passage,
"Quite simply, it is because households are still carrying far too much debt on their balance sheets. Relative to income, debt today is approximately twice as high for families as it was in the 1980s. Total borrowing in relation to disposable, personal after-tax income leaped to approximately 136% in the first quarter of 2008 from 60% in the early 1980s before it began to recede. It has now declined to 117% of income compared to the pre- bubble norm of 70%. To return to that level, debt would have to be reduced by another $6 trillion. Similarly, the debt-to-asset ratio in relation to household assets is currently 20%, but the pre-bubble norm was 12.5%. The deleveraging process still has a long ways to go.
As more U.S. households pay down their debt, the slowdown in consumer spending will continue. The savings rate, which had averaged 8.6% during the 1980s and 5.5% in the 1990s, dropped to an alarming 2.8% in the 2000s. No longer are households engaging in mortgage equity cash-outs to the tune of over $80 billion per quarter, as they did in 2006. Cash-out refinancing today has dropped by 90%, contracting the available funds that helped power the pre-2007 spending binge."
In short, Zuckerman cites the data which explain why even the very slow job growth that seems to be fretfully emerging is not going to be sufficient to cure our ills. We're experiencing and witnessing continuing consumer de-leveraging after a decade of financial decline.
If you look closely at these comparative statistics, it describes how much different the decades of the 1990s and 2000s were from the 1980s. That earliest decade was, at the time, considered one of prosperity. Yet, in terms of personal financial balance sheets, it was relatively restrained.
From the perspective Zuckerman provides, the last twenty years have truly been an aberration.
Zuckerman continues by observing,
"Not surprisingly, middle-class Americans are growing increasingly leery of debt. This trend will continue as more families realize their retirement nest egg is going to be a whole lot smaller than they expected. Credit cards provide a marker. In a survey taken towards the end of last year by Javelin Strategy & Research, only 45% of households used credit cards in 2010, compared to 56% in 2009, and 87% in 2007.
Virtually every index of consumer sentiment supports this sense of consumer restraint. In a recent poll taken by the Pew Research Center, 71% of American consumers say they are buying less expensive brands, 57% say they have trimmed or eliminated vacations, 11% have postponed marriage or children, and 9% have moved in with their families, reducing spending on alcoholic beverages, clothing and restaurants. In other words, roughly 25 million unemployed or partially unemployed Americans are focusing on basic necessities. They make up a part of the 42 million Americans on food stamps.
Quite simply, American households are seeking to become net savers, not net borrowers. This is hardly surprising when real median household incomes are down over 4% from the 2000-2009 decade, according to recent research conducted by Mr. Rosenberg at Gluskin Sheff. Net worth has declined by more than $100,000 for the average household compared to just three years ago, and total household net worth is $12 trillion lower today than at the pre-recession peak—an unprecedented decline of 18.5% over three years. The bulk of this loss comes from diminished home equity, and with more than six million homes in inventory or in foreclosure, prices have been declining again for the past six months."
Here, Zuckerman has provided some of the income and spending details to identify why and how the consumer balance sheet changes he noted in the previous passage are occurring. It's stunning stuff, is it not? These are the sorts of behaviors probably last experienced forty years ago, during the Carter-era stagflation. That is, American families making sizable lifestyle changes in order to survive,
"In short, the triple whammy of weak consumer sales, a weak housing market, and a deeply anemic job market is still very much with us. There are no quick fixes to the post-bubble credit collapse. The painful process of deleveraging is far from over. Current debt loads are not sustainable either by incomes or asset values, which are falling.
That's why our economic pulse is so weak. Real GDP growth is less than half of what one would ordinarily expect to see coming out of such a deep downturn. And there has been virtually no recovery at all with respect to housing, income levels and employment."
So there you have it in a nutshell. Consumer deleveraging, by the numbers. The related income and expense consequences. I think the data are convincing and compelling. We have a signficant shift in consumer economic and financial behaviors.
In conclusion, Zuckerman wrote,
"The government's February jobs report reaped a slew of cheerful headlines. But much of the bounce came in construction, where workers were kept idle by January's snowfalls. Job gains for the past three months averaged just 135,000—we need 150,000 a month just to keep pace with population. And government figures don't take into account the two million plus discouraged workers who've dropped out of the labor force over the past year and a half and are still unemployed. If counted, the jobless rate would have been 11.5% in February."
I don't particularly agree with his final comments suggesting another federal stimulus, whether monetary or fiscal. But his analysis of the current US economic situation is, I believe, correct. The trouble is, many want government to do something. Nobody seems to be capable anymore of simply accepting the pain and consequences of prior economic mistakes.
But now, that's probably what is necessary for the US economy to fully recover to its potential.
Tuesday, January 04, 2011
Mort Zuckerman On Commercial & Residential Real Estate In 2011
On the afternoon of yesterday's post regarding housing prices, Mortimer Zuckerman, the Chairman of Boston Properties, as well as US News & World Report, weighed in with similar views to Peter Schiff's in an interview on CNBC.
It was interesting to observe Zuckerman carefully avoiding agreeing with CNBC co-anchors that commercial real estate would henceforth escape a serious crisis. What he did say was that his Boston Properties firm, which just purchased the Hancock Center in Boston, concentrates on high-end commercial properties, which do better in downturns. He implied that he expected a further softening of the market, but didn't explicitly say that.
However, he did reinforce Schiff's contentions, in the latter's recent Wall Street Journal piece. He went on to observe that with continued high unemployment and probable declines in residential real estate prices, there could well be an economic softening later this year. Further, he railed against continued excessive government spending, even in the guise of the recent tax rate extension bill.
Zuckerman isn't infallible, but he's a very shrewd guy. It seems that evidence continues to mount for worrisome, real estate-led economic developments later this year.
It was interesting to observe Zuckerman carefully avoiding agreeing with CNBC co-anchors that commercial real estate would henceforth escape a serious crisis. What he did say was that his Boston Properties firm, which just purchased the Hancock Center in Boston, concentrates on high-end commercial properties, which do better in downturns. He implied that he expected a further softening of the market, but didn't explicitly say that.
However, he did reinforce Schiff's contentions, in the latter's recent Wall Street Journal piece. He went on to observe that with continued high unemployment and probable declines in residential real estate prices, there could well be an economic softening later this year. Further, he railed against continued excessive government spending, even in the guise of the recent tax rate extension bill.
Zuckerman isn't infallible, but he's a very shrewd guy. It seems that evidence continues to mount for worrisome, real estate-led economic developments later this year.
Monday, January 03, 2011
Housing Price Trends
Despite dire warnings for the just-finished year 2010, the S&P500, according to today's Wall Street Journal, posted a 15.06% return for the year.
Yet home prices continue to be a sobering economic backdrop for the US economy in 2011. Thursday's Journal featured an editorial by Peter Schiff entitled Home Prices Are Still Too High.
Schiff details the meteoric rise of the Case-Shiller 10-City Index gains of an average of 19.2% per year from January, 1998 to June, 2006. Schiff contrasts this with the index's co-creator, Robert Shiller's calculation that the average US home price increase for 1900-2000 was only 3.35% per year. Using this datapoint, Schiff's Big Point is that the current Case-Shiller Index "remains well above the long-term trend."
Doing the math, Schiff contends that "this would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line."
Ouch!
Schiff adds these observations,
"From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with."
Listening to quite a few economists, one is reminded that, while sectors like technology have continued to grow, housing in the US remains mired in recession, or at least a doldrums. Schiff makes reasonable points concerning the government's continued actions to unrealistically prop up housing values and (unfairly)discriminate in favor of current homeowners, rather than prospective ones, at lower prices.
That 20.3% further decline, even if only in the once-hottest real estate growth markets, would seem to portend some economic pain for 2011. And just a few weeks ago, pundits, including S&P's David Blitzer, have warned of the second part of the notorious 'double-dip' recession.
Sometimes equity markets feast on short-term trends, amidst larger, longer and more painful economic trends. There was at least one equity bull market during the Great Depression of the 1930s.
With an allegedly more fiscally conservative Republican House majority and the US at record levels of foreign-held debt, it's unclear how much longer the federal government can mask the true weakness of the housing markets. We know that the nation's large commercial banks continue to sit on many properties which should be foreclosed and resold on public markets, which will almost certainly drive prices down again across many areas in the US, thus causing more damage to household net worths and, probably, spending.
Whether this purported housing sector weakness, as Schiff suggests, will spill over into the general economy in 2011, is something to seriously consider.
Yet home prices continue to be a sobering economic backdrop for the US economy in 2011. Thursday's Journal featured an editorial by Peter Schiff entitled Home Prices Are Still Too High.
Schiff details the meteoric rise of the Case-Shiller 10-City Index gains of an average of 19.2% per year from January, 1998 to June, 2006. Schiff contrasts this with the index's co-creator, Robert Shiller's calculation that the average US home price increase for 1900-2000 was only 3.35% per year. Using this datapoint, Schiff's Big Point is that the current Case-Shiller Index "remains well above the long-term trend."
Doing the math, Schiff contends that "this would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line."
Ouch!
Schiff adds these observations,
"From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with."
Listening to quite a few economists, one is reminded that, while sectors like technology have continued to grow, housing in the US remains mired in recession, or at least a doldrums. Schiff makes reasonable points concerning the government's continued actions to unrealistically prop up housing values and (unfairly)discriminate in favor of current homeowners, rather than prospective ones, at lower prices.
That 20.3% further decline, even if only in the once-hottest real estate growth markets, would seem to portend some economic pain for 2011. And just a few weeks ago, pundits, including S&P's David Blitzer, have warned of the second part of the notorious 'double-dip' recession.
Sometimes equity markets feast on short-term trends, amidst larger, longer and more painful economic trends. There was at least one equity bull market during the Great Depression of the 1930s.
With an allegedly more fiscally conservative Republican House majority and the US at record levels of foreign-held debt, it's unclear how much longer the federal government can mask the true weakness of the housing markets. We know that the nation's large commercial banks continue to sit on many properties which should be foreclosed and resold on public markets, which will almost certainly drive prices down again across many areas in the US, thus causing more damage to household net worths and, probably, spending.
Whether this purported housing sector weakness, as Schiff suggests, will spill over into the general economy in 2011, is something to seriously consider.
Thursday, December 30, 2010
Is Case-Shiller Now Portending The Dreaded "Double-Dip" Recession?
After months of being informed by many economists and pundits that risks of the much-feared "double dip" recession were nil, S&P's David Blitzer now states otherwise.
"There is no good news in October's report," said David Blitzer, chairman of the committee that released the Standard & Poor's/Case-Shiller home-price index. Citing expired tax credits for homebuyers and a lackluster national economy among the causes, Blitzer said "on a year-over-year basis, sales are down more than 25 percent and the month's supply of unsold homes is about 50 percent above where it was during the same months of last year."
The Case-Shiller index plunged unexpectedly, posting some price declines. Spinning this trend out, property values are set to slide, with more foreclosures to add to the backlog currently residing on the balance sheets of major commercial banks.
Slice it any way you wish, housing price declines mean less household net asset value and potentially lower spending levels.
Thus, the feared recessionary impact of the recent Case-Shiller data.
It adds more complexity to the already murky economic picture for early 2011.
On one hand, you have robust S&P500 earnings and balance sheets heavy with spendable, investible liquid assets, coupled with newly-legislated, extended tax rates.
Then, again, you have high unemployment, a continued bloated federal deficit, and state and municipal financial woes.
With that uncertain backdrop of conflicting influences, this week's Case-Shiller Index news landed with a worrying thud. It's hard to believe it bodes well for the US economy in the months ahead.
So much for all the Pollyanna pundits of 2010 assuring us that residential real estate woes were in the rear view mirror.
"There is no good news in October's report," said David Blitzer, chairman of the committee that released the Standard & Poor's/Case-Shiller home-price index. Citing expired tax credits for homebuyers and a lackluster national economy among the causes, Blitzer said "on a year-over-year basis, sales are down more than 25 percent and the month's supply of unsold homes is about 50 percent above where it was during the same months of last year."
The Case-Shiller index plunged unexpectedly, posting some price declines. Spinning this trend out, property values are set to slide, with more foreclosures to add to the backlog currently residing on the balance sheets of major commercial banks.
Slice it any way you wish, housing price declines mean less household net asset value and potentially lower spending levels.
Thus, the feared recessionary impact of the recent Case-Shiller data.
It adds more complexity to the already murky economic picture for early 2011.
On one hand, you have robust S&P500 earnings and balance sheets heavy with spendable, investible liquid assets, coupled with newly-legislated, extended tax rates.
Then, again, you have high unemployment, a continued bloated federal deficit, and state and municipal financial woes.
With that uncertain backdrop of conflicting influences, this week's Case-Shiller Index news landed with a worrying thud. It's hard to believe it bodes well for the US economy in the months ahead.
So much for all the Pollyanna pundits of 2010 assuring us that residential real estate woes were in the rear view mirror.
Thursday, November 11, 2010
How Did We Return To The Brink of 1970s Stagflation?
You sit up and take notice when people as diverse as economist Alan Reynolds, former Reagan Treasury official Bob Zoellick, and former Alaskan Governor Sarah Palin decry, the latter two in the same edition of the Wall Street Journal, the Fed's QE2 policies for stoking inflation.
Palin's remarks demonstrated a surprisingly firm and clear understanding that Helicopter Ben's recent QE2 monetization of Treasury debt is weakening the dollar, thus driving dollar-denominated prices of commodities skyward.
Add to this Alan Meltzer's Journal editorial a week ago, entitled Milton Friedman vs. the Fed, and you should really be worried. Meltzer began his piece,
"Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.
Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it."
That's what I recall from my undergraduate economics courses, as well. Friedman was famous for eschewing any active currency creation, instead, legislating some constant rate of growth of the currency, perhaps related to population or GDP growth rates.
On the subject of inflation measurement and expectations, Meltzer helpfully wrote,
"In the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch the core deflator for personal consumption expenditure—the PCE deflator. Since then, the Fed has used that measure as its inflation target. Recently, without much publicity, the Fed switched to the consumer price index (CPI). The reason? From 2003 to 2009, the two measures moved together. In 2010, they diverged—and the CPI shows substantially less inflation than the PCE.
Even so, the most recent PCE deflator shows inflation running at around 1.2% annually, about where the Fed says it wants to hold the inflation rate. And it has been between 1.5% and 1.8% for a year. There is no sign of deflation.
The two measures diverged because they give different weights to their components, especially housing prices. The CPI gives almost double the weight to housing prices, especially the rental value of owner-occupied houses. This is not a number that government statisticians sample in the market. They make an estimate. The new long-term bond purchase program puts a lot of weight on a weak foundation.
Paul Volcker and Alan Greenspan restored much of the credibility that the Fed lost in the great inflation of the 1970s. The Fed's plan to increase inflation puts this credibility at risk and is a large step away from the policy that Milton Friedman favored."
So we see that the Fed has been playing fast and loose with measured inflation, while somewhat unbelievably declaring that the current risk to the economy is deflation. I distinctly read of Bernanke's recent comments about how slack labor markets virtually guarantee no imminent inflation. This while commodity prices such as copper, corn and oil spike to new highs, thanks to global perceptions of the administration's and Fed's weak dollar policy.
Can anybody say "stagflation?" Art Laffer wrote a Journal editorial just over a year ago, on which I wrote this post. He rather eerily foresaw what is now occurring. A few years ago, I dismissed some pundits' fears of stagflation, because, then, monetary policy-induced inflation wasn't yet evident. It is now.
I well recall, though young at the time, the decade of monetary policy incompetence delivered by Fed Chairmen Arthur Burns and G. William Miller. They presided over the monetary half of US stagflation, while LBJ's Great Society spending, combined with the Vietnam war, provided the fiscal half.
Is it really that possible that we've learned nothing from that era, as well as, per Laffer's editorial, the 1930s? What more evidence is needed for the Fed and Congress to understand where their joint policies are headed?
Only, this time, global interests and ubiquitous information make reactions near-immediate and much more damaging. As significant as our deficits and foreign-held debt were in the 1970s, they are far larger now. And today's global economy is much more multi-lateral than it was forty years ago.
Reynolds notes this in his recent Journal editorial, Ben Bernanke's Impossible Dream, in which he uses an EFT which ultra-shorts Treasuries, TBT, as a barometer of market reaction to Fed moves,
"Producer prices rose at an annual rate of 5.5% in September and 4.8% in August. The broad price index for GDP rose at an annual rate of 2.3% in the third quarter, up from 1.9% in the second quarter and 1% in the first.
Mr. Bernanke is unconcerned, however, because he believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing.
This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn't intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?
On Oct. 15, Mr. Bernanke gave another speech, at the Boston Fed, saying, "Inflation is running at rates that are too low . . . and the risk of deflation is higher than desirable." TBT rose again to 34.17, up from 33.34. On Nov. 3, when the scope of the Fed's long-term Treasury purchase plan was revealed, TBT jumped from 32.69 at 2:12 p.m. (EST), just before the news was released, to 34.99 by 3:34 p.m. (TBT closed Monday at 34.99.) If the Fed's plan really portends a sustainable reduction in long-term rates ahead, TBT should have moved in the opposite direction. When technocrats and markets disagree, it is rarely wise to bet against the markets.
There is ample evidence from commodity and foreign-exchange markets that world investors are indeed confident the Fed will raise inflation. However, the growing interest in shorting long-term Treasury bonds shows that the market does not believe higher inflation is consistent with lower long-term interest rates.
In other words, Mr. Bernanke and his FOMC allies are risking higher interest rates and inflated commodity costs in the pursuit of the contradictory objectives of higher inflation and lower bond yields, seemingly oblivious to all the evidence that they are pursuing an impossible dream."
Why is it a collection of notable economists are observing, across a variety of media, that the Fed is pursuing a foolish goal which will lead to sharply increased inflation, and, yet, the Fed and Bernanke seem largely unmoved?
Now, more than any other time in history, large numbers of investors, economists and various pundits have access to historical evidence and current data to make the case that US policy makers, both monetary and fiscal, are retracing steps down a painfully familiar road to stagflation.
Yet the Fed continues on this dangerous and foolish path.
Palin's remarks demonstrated a surprisingly firm and clear understanding that Helicopter Ben's recent QE2 monetization of Treasury debt is weakening the dollar, thus driving dollar-denominated prices of commodities skyward.
Add to this Alan Meltzer's Journal editorial a week ago, entitled Milton Friedman vs. the Fed, and you should really be worried. Meltzer began his piece,
"Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.
Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it."
That's what I recall from my undergraduate economics courses, as well. Friedman was famous for eschewing any active currency creation, instead, legislating some constant rate of growth of the currency, perhaps related to population or GDP growth rates.
On the subject of inflation measurement and expectations, Meltzer helpfully wrote,
"In the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch the core deflator for personal consumption expenditure—the PCE deflator. Since then, the Fed has used that measure as its inflation target. Recently, without much publicity, the Fed switched to the consumer price index (CPI). The reason? From 2003 to 2009, the two measures moved together. In 2010, they diverged—and the CPI shows substantially less inflation than the PCE.
Even so, the most recent PCE deflator shows inflation running at around 1.2% annually, about where the Fed says it wants to hold the inflation rate. And it has been between 1.5% and 1.8% for a year. There is no sign of deflation.
The two measures diverged because they give different weights to their components, especially housing prices. The CPI gives almost double the weight to housing prices, especially the rental value of owner-occupied houses. This is not a number that government statisticians sample in the market. They make an estimate. The new long-term bond purchase program puts a lot of weight on a weak foundation.
Paul Volcker and Alan Greenspan restored much of the credibility that the Fed lost in the great inflation of the 1970s. The Fed's plan to increase inflation puts this credibility at risk and is a large step away from the policy that Milton Friedman favored."
So we see that the Fed has been playing fast and loose with measured inflation, while somewhat unbelievably declaring that the current risk to the economy is deflation. I distinctly read of Bernanke's recent comments about how slack labor markets virtually guarantee no imminent inflation. This while commodity prices such as copper, corn and oil spike to new highs, thanks to global perceptions of the administration's and Fed's weak dollar policy.
Can anybody say "stagflation?" Art Laffer wrote a Journal editorial just over a year ago, on which I wrote this post. He rather eerily foresaw what is now occurring. A few years ago, I dismissed some pundits' fears of stagflation, because, then, monetary policy-induced inflation wasn't yet evident. It is now.
I well recall, though young at the time, the decade of monetary policy incompetence delivered by Fed Chairmen Arthur Burns and G. William Miller. They presided over the monetary half of US stagflation, while LBJ's Great Society spending, combined with the Vietnam war, provided the fiscal half.
Is it really that possible that we've learned nothing from that era, as well as, per Laffer's editorial, the 1930s? What more evidence is needed for the Fed and Congress to understand where their joint policies are headed?
Only, this time, global interests and ubiquitous information make reactions near-immediate and much more damaging. As significant as our deficits and foreign-held debt were in the 1970s, they are far larger now. And today's global economy is much more multi-lateral than it was forty years ago.
Reynolds notes this in his recent Journal editorial, Ben Bernanke's Impossible Dream, in which he uses an EFT which ultra-shorts Treasuries, TBT, as a barometer of market reaction to Fed moves,
"Producer prices rose at an annual rate of 5.5% in September and 4.8% in August. The broad price index for GDP rose at an annual rate of 2.3% in the third quarter, up from 1.9% in the second quarter and 1% in the first.
Mr. Bernanke is unconcerned, however, because he believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing.
This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn't intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?
On Oct. 15, Mr. Bernanke gave another speech, at the Boston Fed, saying, "Inflation is running at rates that are too low . . . and the risk of deflation is higher than desirable." TBT rose again to 34.17, up from 33.34. On Nov. 3, when the scope of the Fed's long-term Treasury purchase plan was revealed, TBT jumped from 32.69 at 2:12 p.m. (EST), just before the news was released, to 34.99 by 3:34 p.m. (TBT closed Monday at 34.99.) If the Fed's plan really portends a sustainable reduction in long-term rates ahead, TBT should have moved in the opposite direction. When technocrats and markets disagree, it is rarely wise to bet against the markets.
There is ample evidence from commodity and foreign-exchange markets that world investors are indeed confident the Fed will raise inflation. However, the growing interest in shorting long-term Treasury bonds shows that the market does not believe higher inflation is consistent with lower long-term interest rates.
In other words, Mr. Bernanke and his FOMC allies are risking higher interest rates and inflated commodity costs in the pursuit of the contradictory objectives of higher inflation and lower bond yields, seemingly oblivious to all the evidence that they are pursuing an impossible dream."
Why is it a collection of notable economists are observing, across a variety of media, that the Fed is pursuing a foolish goal which will lead to sharply increased inflation, and, yet, the Fed and Bernanke seem largely unmoved?
Now, more than any other time in history, large numbers of investors, economists and various pundits have access to historical evidence and current data to make the case that US policy makers, both monetary and fiscal, are retracing steps down a painfully familiar road to stagflation.
Yet the Fed continues on this dangerous and foolish path.
Wednesday, October 20, 2010
David Malpass, WSJ & CNBC
David Malpass, the economist and former Deputy Assistant Treasury Secretary, wrote an excellent editorial in yesterday's Wall Street Journal entitled How the Fed Is Holding Back Recovery.
Malpass contends that Bernanke's easy money, low-interest rate policy is destroying US jobs and causing significant, difficult-to-reverse shifts in the US economy.
Specifically, he wrote,
"Corporate and government jobs are faring better than small business jobs, another major structural change that Fed purchases will exacerbate by channeling cheap credit to big entities.
Jobs are moving to Asia as Washington's weak-dollar policy causes trillions of dollars to move abroad to protect against the risk of U.S. inflation and dollar debasement. Investors put their money into foreign factories, mines and workers, creating a boom there. They avoid long-term job-creating investments here, instead buying short-term IOUs from our government.
The damage is substantial. Near-zero interest rates are hammering savers, while transferring hundreds of billions of dollars annually to bond issuers- mostly governments, banks and bigger corporations. The weaker dollar is pushing risk capital away from this country and toward Asia and emerging markets."
No longer a candidate for the US Senate, from New York, Malpass is once again appearing on CNBC, and he did so yesterday in support of his Journal piece. As usual, he articulately advanced his theses.
The comedy, to be charitable, came when the co-anchor introduced CNBC's senior economic idiot Steve Liesman to debate Malpass' recent editorial.
It would be different if the network had retained the services of, say, Alan Reynolds, Greg Mankiew, Joseph Stiglitz or some other well-known and -respected economist for these sorts of discussions. Even hiring a lesser-known economist who at least has a PhD, has published some relevant macroeconomic research, and perhaps worked at the Fed, Treasury or for a major corporation or economic consultant would make sense.
But Liesman has no economics degree. He's a journalist with a misguided interest in economics.
Having Liesman debate Malpass would be like me, with my interest in physics and mathematics, debating some physicist with an endowed chair from MIT, CalTech or a similarly well-regarded institution. While I might be capable of understanding the physicist's remarks, and asking some questions, I would be out of my depth advancing a separate explanation for some phenomenon under discussion.
And that's pretty much how it went for Liesman. He babbled nonsensically, using a variety of terms and measures which he evidently thought mattered. The worst was when he summed up his differences with Malpass, using language to the effect that 'in his opinion,' blah blah blah.....as if anyone cares what that would be.
To return to my analogy, if I were to be debating a physicist, I would probably have prepared by asking other noted, well-regarded, perhaps prize-winning physicists what they thought of my opponent's ideas. That way, I wouldn't be presuming to put my own undegreed, untested physics ideas on a par with the real physicist, but, rather, I'd be standing in for other physicists of note and representing their questions, concerns and rebuttals.
But that wasn't what Liesman did. He has been in the job with CNBC for so long that he apparently believes he's an economist, and capable of advancing his own independent economic constructs against real economists with Phds and experience in responsible, real-world positions in the field.
The longer CNBC employs Liesman in any economics-related capacity, the longer it damages its own credibility on economic matters.
Malpass contends that Bernanke's easy money, low-interest rate policy is destroying US jobs and causing significant, difficult-to-reverse shifts in the US economy.
Specifically, he wrote,
"Corporate and government jobs are faring better than small business jobs, another major structural change that Fed purchases will exacerbate by channeling cheap credit to big entities.
Jobs are moving to Asia as Washington's weak-dollar policy causes trillions of dollars to move abroad to protect against the risk of U.S. inflation and dollar debasement. Investors put their money into foreign factories, mines and workers, creating a boom there. They avoid long-term job-creating investments here, instead buying short-term IOUs from our government.
The damage is substantial. Near-zero interest rates are hammering savers, while transferring hundreds of billions of dollars annually to bond issuers- mostly governments, banks and bigger corporations. The weaker dollar is pushing risk capital away from this country and toward Asia and emerging markets."
No longer a candidate for the US Senate, from New York, Malpass is once again appearing on CNBC, and he did so yesterday in support of his Journal piece. As usual, he articulately advanced his theses.
The comedy, to be charitable, came when the co-anchor introduced CNBC's senior economic idiot Steve Liesman to debate Malpass' recent editorial.
It would be different if the network had retained the services of, say, Alan Reynolds, Greg Mankiew, Joseph Stiglitz or some other well-known and -respected economist for these sorts of discussions. Even hiring a lesser-known economist who at least has a PhD, has published some relevant macroeconomic research, and perhaps worked at the Fed, Treasury or for a major corporation or economic consultant would make sense.
But Liesman has no economics degree. He's a journalist with a misguided interest in economics.
Having Liesman debate Malpass would be like me, with my interest in physics and mathematics, debating some physicist with an endowed chair from MIT, CalTech or a similarly well-regarded institution. While I might be capable of understanding the physicist's remarks, and asking some questions, I would be out of my depth advancing a separate explanation for some phenomenon under discussion.
And that's pretty much how it went for Liesman. He babbled nonsensically, using a variety of terms and measures which he evidently thought mattered. The worst was when he summed up his differences with Malpass, using language to the effect that 'in his opinion,' blah blah blah.....as if anyone cares what that would be.
To return to my analogy, if I were to be debating a physicist, I would probably have prepared by asking other noted, well-regarded, perhaps prize-winning physicists what they thought of my opponent's ideas. That way, I wouldn't be presuming to put my own undegreed, untested physics ideas on a par with the real physicist, but, rather, I'd be standing in for other physicists of note and representing their questions, concerns and rebuttals.
But that wasn't what Liesman did. He has been in the job with CNBC for so long that he apparently believes he's an economist, and capable of advancing his own independent economic constructs against real economists with Phds and experience in responsible, real-world positions in the field.
The longer CNBC employs Liesman in any economics-related capacity, the longer it damages its own credibility on economic matters.
Friday, October 15, 2010
A Spectrum of Economic Doomsayers
The pages of the Wall Street Journal over the past few weeks have featured a number of editorials forecasting economic doom.
For example, Phil Gramm, former Senator and economics professor, wrote a piece comparing the current political and economic climate to those of the Depression. Using updated statistics and an approach echoing that of Amity Schlaes in her important recent book, The Forgotten Man, Gramm at least painted a brighter picture of today's faster-moving electoral changes as a response to federal economic missteps.
Donald Luskin focused on looming trade wars and a technical overlay of recent Dow index performances with those of the late 1930s. Luskin suggested that taking the wrong road now on trade and protectionism could well fulfill the technical pattern of a catastrophic market decline.
Mort Zuckerman, a noted successful entrepreneur and investor, wrote of the continuing damage that the housing sector inflicts on the US economy. In short, he criticized continued government manipulation, i.e., support, of prices, thus prolonging the bottoming and eventual recovery of this sector. Zuckerman noted that, with the recent cratering of housing due to oversupply and overly-generous financing terms, new would-be buyers don't see a home as the automatic, guaranteed, tax-advantaged savings opportunity that it historically has been. Thus, the depressed demand in the face of government-tainted, higher-than-market-clearing prices.
Finally, on Monday of this week, Carnegie Mellon economist Allan Meltzer wrote another version of the now-familiar tale of the Fed fixing a problem that doesn't exist. Specifically, stoking inflation with too-low rates, when what ails business is uncertainty regarding Washington's heavy, erratic regulatory hand and demonizing tone.
Providing evidence that prolonged deflation has rarely occurred, and the one time it indisputably did was during the Great Depression, when the gold standard caused the money supply to shrink due to hoarding in the wake of bank failures. Reading Meltzer's editorial, it's difficult to see how we are not sowing the seeds for both the next investment bubble and long-term inflation. And, as he suggests, eventually, "a flight from government bonds."
It's all scary, and, yet, equity markets have rebounded since late 2008 and early 2009. Unemployment remains high and sticky, but corporate profits have grown.
Still hanging out in the ether is Art Laffer's June WSJ editorial predicting wholesale economic disaster in 2011 if the planned tax hikes are allowed to take effect.
What to think?
It's really hard to simply write off all of these concerns and predictions of continuing economic dislocation, misallocation of resources and under-performance of the US economy in the face of attempts to micro- and macro-manage so many elements of this complex system. Short term equity market moves can reflect short term profits, sentiments, etc. The very existence of liquid equity markets allows for the belief by investors that, come the time it's necessary, they can sell quickly and even go short.
I do know this. Reviewing equity portfolios and performances from earlier in the decade, and the mid-1990s, today's economy and equity markets just don't look healthy. The number of companies passing muster as investments is much fewer than in the past, while the pattern and strength of the S&P is much more erratic, and weaker.
This doesn't appear to be a truly healthy equity market, yet, and it's certainly far from a healthy US economy, too.
For example, Phil Gramm, former Senator and economics professor, wrote a piece comparing the current political and economic climate to those of the Depression. Using updated statistics and an approach echoing that of Amity Schlaes in her important recent book, The Forgotten Man, Gramm at least painted a brighter picture of today's faster-moving electoral changes as a response to federal economic missteps.
Donald Luskin focused on looming trade wars and a technical overlay of recent Dow index performances with those of the late 1930s. Luskin suggested that taking the wrong road now on trade and protectionism could well fulfill the technical pattern of a catastrophic market decline.
Mort Zuckerman, a noted successful entrepreneur and investor, wrote of the continuing damage that the housing sector inflicts on the US economy. In short, he criticized continued government manipulation, i.e., support, of prices, thus prolonging the bottoming and eventual recovery of this sector. Zuckerman noted that, with the recent cratering of housing due to oversupply and overly-generous financing terms, new would-be buyers don't see a home as the automatic, guaranteed, tax-advantaged savings opportunity that it historically has been. Thus, the depressed demand in the face of government-tainted, higher-than-market-clearing prices.
Finally, on Monday of this week, Carnegie Mellon economist Allan Meltzer wrote another version of the now-familiar tale of the Fed fixing a problem that doesn't exist. Specifically, stoking inflation with too-low rates, when what ails business is uncertainty regarding Washington's heavy, erratic regulatory hand and demonizing tone.
Providing evidence that prolonged deflation has rarely occurred, and the one time it indisputably did was during the Great Depression, when the gold standard caused the money supply to shrink due to hoarding in the wake of bank failures. Reading Meltzer's editorial, it's difficult to see how we are not sowing the seeds for both the next investment bubble and long-term inflation. And, as he suggests, eventually, "a flight from government bonds."
It's all scary, and, yet, equity markets have rebounded since late 2008 and early 2009. Unemployment remains high and sticky, but corporate profits have grown.
Still hanging out in the ether is Art Laffer's June WSJ editorial predicting wholesale economic disaster in 2011 if the planned tax hikes are allowed to take effect.
What to think?
It's really hard to simply write off all of these concerns and predictions of continuing economic dislocation, misallocation of resources and under-performance of the US economy in the face of attempts to micro- and macro-manage so many elements of this complex system. Short term equity market moves can reflect short term profits, sentiments, etc. The very existence of liquid equity markets allows for the belief by investors that, come the time it's necessary, they can sell quickly and even go short.
I do know this. Reviewing equity portfolios and performances from earlier in the decade, and the mid-1990s, today's economy and equity markets just don't look healthy. The number of companies passing muster as investments is much fewer than in the past, while the pattern and strength of the S&P is much more erratic, and weaker.
This doesn't appear to be a truly healthy equity market, yet, and it's certainly far from a healthy US economy, too.
Tuesday, September 28, 2010
Selective Recall: Former Fed Governor Randy Kroszner On CNBC This Morning
Former Fed governor Randy Kroszner appeared on CNBC this morning, fully displaying a case of extremely selective memory regarding monetary policy and the Great Depression.
When co-anchor and token conservative Joe Kernen asked Kroszner if it wasn't possible tit was time to just let the economy recover on its own, Krosznerhat immediately channeled the ghost of the Great Depression, claiming 'they tried that in the 1930s and look what you got.'
Evidently, Kroszner's only knowledge of history comes from Friedman and Kagan's A Monetary History of the United States.
Never mind the tax hikes, regulatory assault on business, a plethora of government agencies designed to compete with business (e.g., TVA), and the Smoot-Hawley Tariff. In Kroszner's world, simply noting the admitted mistake of excessive tightening and employment of the 'real bills' doctrine choked US money supply during the Depression, so its opposite must be employed now, e.g., excessive monetary easing.
I guess when you've been a member of the Fed, it's impossible for you to see it as a warped, possibly-unconstitutional, grossly imperfect and usually badly-run central bank. Kroszner clearly has no ability to even entertain the thought that, as Alan Reynolds' research has shown, a little over a year ago in the Wall Street Journal, that the Fed's interventions in periods of economic softness have deepened and lengthened US recessions.
When challenged, Kroszner solemnly intones or implies that now-familiar argument so often used by the current administration in defense of its wasted, nearly-pointless fiscal stimulus programs,
'Ah, but it would have been so much worse without Fed intervention.'
By appearing on CNBC with the grandeur of a monetary wizard, and the deference of the co-anchors, Kroszner delivers a sense of certainty and absolutism in defense of any Fed intervention, no matter how massive nor disruptive of naturally-clearing and healing financial markets. And no matter that actual evidence of Kroszner's contentions is non-existent.
When co-anchor and token conservative Joe Kernen asked Kroszner if it wasn't possible tit was time to just let the economy recover on its own, Krosznerhat immediately channeled the ghost of the Great Depression, claiming 'they tried that in the 1930s and look what you got.'
Evidently, Kroszner's only knowledge of history comes from Friedman and Kagan's A Monetary History of the United States.
Never mind the tax hikes, regulatory assault on business, a plethora of government agencies designed to compete with business (e.g., TVA), and the Smoot-Hawley Tariff. In Kroszner's world, simply noting the admitted mistake of excessive tightening and employment of the 'real bills' doctrine choked US money supply during the Depression, so its opposite must be employed now, e.g., excessive monetary easing.
I guess when you've been a member of the Fed, it's impossible for you to see it as a warped, possibly-unconstitutional, grossly imperfect and usually badly-run central bank. Kroszner clearly has no ability to even entertain the thought that, as Alan Reynolds' research has shown, a little over a year ago in the Wall Street Journal, that the Fed's interventions in periods of economic softness have deepened and lengthened US recessions.
When challenged, Kroszner solemnly intones or implies that now-familiar argument so often used by the current administration in defense of its wasted, nearly-pointless fiscal stimulus programs,
'Ah, but it would have been so much worse without Fed intervention.'
By appearing on CNBC with the grandeur of a monetary wizard, and the deference of the co-anchors, Kroszner delivers a sense of certainty and absolutism in defense of any Fed intervention, no matter how massive nor disruptive of naturally-clearing and healing financial markets. And no matter that actual evidence of Kroszner's contentions is non-existent.
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