Re: media influence

On Jan 21, 2008 6:45 PM, Bobby wrote:
> Hi
>
> Don’t you think the Media has something to do with this.

Hi, yes definitely, and it’s always that way- goes with the territory. adds to volatility.

Every time you turn on the TV, open a newspaper, read the web, it says we are in a recession or we are about to be in one etc etc. ? Or more negative things. We are bombarded with this, as are others around the world, 24/7. Like now the NY Times online feature story says Stocks Worldwide Plunge on US Recession Fears. All it does is scare the people that aren’t as smart as you or see things as you do for what they are.

True, and worse. Look at this story from earlier today:

U.S. consumers pull back on spending, worry more about debt as economy weakens

Note the title. Then, look for any evidence of a pullback on spending.

NEW YORK – Joi Freemont, a dentist in suburban Atlanta, doesn’t have to look further than her appointment book to tell that people are worried about money.

Patients who used to get their teeth whitened all the time “now want to think about it a bit,” she said. Braces? “People were getting them for the kids, for themselves, but now they’re waiting,” she added. And when people get cavities, they have their fillings done one a month, not five or six at a time, she said.

As a result, Freemont and her husband are worried their income could drop

Could drop – hasn’t dropped yet.

and are trying to be more prudent with their money. They’re monitoring spending more closely and continuing to whittle down their credit card balances and her dental school debt, she said.

Paying down debt from income – this is not typical, as consumer credit rose at the last report.

“We know how to put the brakes on if we have to,” said Freemont, 35.

‘If we have to’ – haven’t yet.

Across America, there are growing signs that consumers are worried about the weakening economy, which could slip into recession.

What growing signs?

While some say Americans are not famed for their belt-tightening tactics, there are signs that people are trying to improve their personal balance sheets so they’re ready for tougher times.

What signs?

Mark Zandi, chief economist at Moody’s Economy.com, said the economic signals “are flashing yellow,” suggesting that consumers need to take care.

What signals?

Jobs are getting harder to find,

Employment and income are still rising as of December and early January reports.

while the crisis in the mortgage industry has made it more difficult for homeowners to borrow against their houses, closing down what has been a major source of extra cash in recent years.

If that has been a factor, there’s little evidence of a material ‘wealth effect’ – it’s been going on for several months, and employment, income, and spending haven’t suffered yet.

Consumers’ budgets have been squeezed by rising food and fuel prices.

Yes, but exports have fill the gap and sustained GDP.

Credit card balances surged through the fall months, according to Federal Reserve figures.

Yes, consumer spending has been OK.

Now delinquency rates on consumer loans are rising, the American Bankers Association reported recently. Even companies that cater to higher-income families, such as American Express Inc., are feeling the pinch.

Delinquencies are rising, but not yet to problem levels. And that’s an overstatement of the announcement by AMEX, which was a statement regarding prospects for next year.

When the economy stumbles, “you have to begin living within your means, or you’ll be forced to do so,” Zandi said.

‘When’ means it hasn’t happened yet.

But Americans are much better spenders than savers, said Greg McBride, senior financial analyst with Bankrate.com, an online financial information service.

“Consumer spending isn’t something that gets turned on and off like a light switch,” he said. “People will say they need to cut back, but they often lack the willpower to do it.”

Still, it appears that people are starting to make an effort.

Starting to make an effort???

Denise Dorman, who runs an advertising and public relations agency in Geneva, Illinois, decided not to replace her 12-year-old vehicle, a Jeep Grand Cherokee with 125,000 miles (200,000 kilometers) on it, to avoid taking on a car payment.

She and her husband Dave, a commercial artist known for his Star Wars illustrations, also are “aggressively paying off credit card debt.” And Dorman is seeking new opportunities to expand her business, perhaps into growth areas such as video-gaming.

“I’ll feel a lot more comfortable when our debt is paid down and business has picked up,” she said.

Sounds like business is good for them – is this the best example the author can find for their recession claim?

The couple experienced the downturn in the housing market firsthand as it took them 18 months to sell their former home in Florida.

True hardship!

They’ve also become increasingly aware of the nation’s deepening economic malaise from news reports and the presidential election debates.

Yes, to your point, Bobby.

“Altogether, it made us rethink what we’re doing financially,” she said.

Frank Krystyniak, 65, director of public relations at Sam Houston State University in Huntsville, Texas, said the uncertain financial
environment and the effect of the upcoming presidential election has him worried that his savings could take a big hit.

So he recently moved his nest egg out of stock and bond funds and into a fixed-rate account that should yield about 4.75 percent a year, he said.

This is not evidence of recession; it’s evidence of the media scaring people into reallocating assets.

He’s also wary of rising gasoline prices, which could curtail his driving to Colorado to visit family and indulge in his hobby of trout fishing.

Could curtail – hasn’t cut back yet.

Some consumer retrenchment might not be a bad idea, said Sheryl Garrett, founder of The Garrett Planning Network of certified financial planners and author of the “Personal Finance Workbook for Dummies.”

High debt and low savings indicate that consumer budgets are out of kilter, she said.

“A mild recession would be a good opportunity _ or cause or excuse _for people to stop and take a deep breath,” Garrett said. “So many people have overextended themselves.

Apart from why this is in here, it also says there’s no recession yet. The article offers no support whatsoever for its headline – because there isn’t any evidence of a consumer pullback yet.

“If you’re living on the edge when times are good, just what are you going to do when they get bad?”

Should be even more intense tomorrow – might get a ‘capitulation’ day or might just keep going down. It’s technical at this point.

warren

>
> Bobby
>


I’ve been wrong on the Fed

> Hi
>
> You’ve been looking for this kind of financial trouble for a bit over in Europe. Good call Warren.
>
> Bobby.
>

Thanks, yes, I called it from mid 2006 – weakness due to deficit too small to support the credit structure, but inflation racing up as food/fuel rise due to Saudis acting the swing producer and biofuels burning up our food supply.

My error was in thinking the inflation would keep the fed from cutting. Been totally wrong on that!

Never would have thought a CB would act this way in the face of a triple negative supply shock – food/fuel/importand export prices all ratcheting up.

And looks like another 50 cut or maybe even 75 or 100 on Jan 30 even as core inflation goes through their ‘comfort zone,’ and Bernanke’s pushing Congress to hike the deficit! Never imagined the Fed would be keen to send a strong ‘we don’t care about inflation’ message, regardless of GDP in the short run. Goes against every aspect of mainstream monetary theory. But they sure are doing it!

And still no major weakness in the real economy, apart from some possible weakness late December if exports fell off. That won’t be out for a while.

All I can come with are three things:

  1. They’ve been misusing futures prices for oil and food to predict inflation will fall.
  2. They are afraid of fixed exchange rate/gold standard types of monetary collapses, even though we have a floating exchange rate policy, where that doesn’t happen and for all practical purposes can’t happen with floating fx.
  3. They are relying on their forecasts for weakness to bring down inflation when it’s coming from a combination of producer price
    setting, biofuels, and Paulson’s weak $ policy chasing foreign central banks away from $US financial assets.

And yes, watch out for a system wide failure of the payments system in the Eurozone if deposit insurance gets tested by a major bank failure.

Also, the $US remains fundamentally strong, but Paulson and to some degree the Fed are scaring investors away from $US financial assets, including US and other pension funds, which keeps the $ cheap enough to drive increasing US exports.

warren


♥

2008-01-21 Update

Major themes intact:

  • weak economy
  • higher prices

Weakness:

US demand soft but supported by exports.

US export strength resulting from non resident ‘desires’ to reduce the rate of accumulation of $US net financial assets. This driving force is ideologically entrenched and not likely to reverse in the next several months.

In previous posts, I suggested the world is ‘leveraged’ to the US demand for $700 billion per year in net imports, as determined by the non resident desire to accumulate 700 billion in $US net financial assets.

US net imports were something over 2% of rest of world GDP, and the investment to support that demand as it grew was probably worth another 1% or more of world GDP.

The shift from an increasing to decreasing US trade deficit is a negative demand shock to rest of world economies.

This comes at a time when most nations have decreasing government budget deficits as a percent of their GDP, also reducing demand.

The shift away from the rest of world accumulation of $US financial assets should continue. Much of it came from foreign CB’s. And now, with Tsy Sec Paulson threatening to call any CB that buys $US a ‘currency manipulator’, it is unlikely the desire to accumulate $US financial assets will reverse sufficiently to stop the increase in US exports. I’m sure, for example, Japan would already have bought $US in substantial size if not for the US ‘weak dollar’ policy.

All else equal, increasing exports is a decrease in the standard of living (exports are a real cost, imports a benefit), so Americans will be continuing to work but consuming less, as higher prices slow incomes, and output goes to non residents.

I also expect a quick fiscal package that will add about 1% to US GDP for a few quarters, further supporting a ‘muddling through’ of US GDP.

Additional fiscal proposals will be coming forward and likely to be passed by Congress. It’s an election year and Congress doesn’t connect fiscal policy with inflation, and the Fed probably doesn’t either, as they consider it strictly a monetary phenomena as a point of rhetoric.

Higher Prices:

Higher prices world wide are coming from both increased competition for resources and imperfect competition in the production and distribution of crude oil. In particular, the Saudis, and maybe the Russians as well, are acting as swing producer. They simply set price and let output adjust to demand conditions.

So the question is how high they will set price. President Bush recently visited the Saudis asking for lower prices, and perhaps the recent drop in prices can be attributed to those meetings. But the current dip in prices may also be speculators reducing positions, which creates short term dips in price, which the Saudis slowly follow down with their posted prices to disguise the fact they are price setters, before resuming their price hikes.

At current prices, Saudi production has actually been slowly increasing, indicating demand is firm at current prices and the Saudis are free to continue raising them as long as desired.

The current US fiscal proposals are designed to help people pay the higher energy prices, further supporting demand for Saudi oil.

They may also be realizing that if they spend their increased income on US goods and services, US GDP is sustained and real terms of trade shift towards the oil producers.

Conclusion:

  • The real economy muddling through
  • Inflation pressures continuing

A word on the financial sector’s continuing interruptions:

With floating exchange rates and countercyclical tax structures we won’t see the old fixed exchange rate types of real sector collapses.

The Eurozone banking sector is the exception, and remains vulnerable to systemic failure, as they don’t have credible deposit insurance in place, and, in fact, the one institution that can readily ‘write the check’ (the ECB) is specifically prohibited by treaty from doing so.

Today, in most major economies, fiscal balances move to substantial, demand supporting deficits with an increase in unemployment of only a few percentage points. Note the US is already proactively adding 1% to the budget deficit with unemployment rising only 0.3% at the last initial observation in December. In fact, fiscal relaxation is being undertaken to relieve financial sector stress, and not stress in the real economy.

Food and energy have had near triple digit increases over the last year or so. Even if they level off, or fall modestly, the cost pressures will continue to move through the economy for several quarters, and can keep core inflation prices above Fed comfort zones for a considerable period of time.

Fiscal measures to support GDP will add to the perception of inflationary pressures.

The popular press is starting to discuss how inflation is hurting working people. For example, I just saw Glen Beck note that with inflation at 4.1% for 07 real wages fell for the first time in a long time, and he proclaimed inflation the bigger fundamental threat than the weakening economy.

I also discussed the mortgage market with a small but national mortgage banker. He’s down 50% year over year, but said the absolute declines leveled off in October, including California. He also pointed out one of my old trade ideas is back – when discounts on pools become excessive to current market rates, buy discounted pools of mortgages and then pay mortgage bankers enough of that discount to be able refinance the individual loans at below market rates.


♥

Re: meltdown?

(an interoffice email)

> … He’s here w/me now & also is very concerned over the entire
> spectrum, especially all the 5/1 ARM’s & 2nd mgtg paper most
> refinancing this year. Ie: orginally good credits, now not. A ton of
> 5/1 Arm paper was done w/ escalations up 40/50% payment wise.

Presumably the borrowers qualified at the time based on the higher payments?

And I see refi’s ratcheting up nicely. Unemployment is about the same, incomes are up, so most borrowers should qualify for refis,
apart from the ones that slipped by with substandard credit in the first place?

> Guess w/these Insurance Cos being downgraded tomorrow will be BLACK Tuesday.
> So, how do we fix a crisis of CONFIDENCE? BB isn’t too convincing these days.

The risk is mark to market risk if there is forced selling by investors that must have rated credits and were relying on the insurance to comply with their ratings criteria.

Forced selling is disruptive for sure- sellers lose, buyers gain as prices go lower than economic and/or recovery value.

Not much the Fed or Congress can do apart from bailing out the bond holders by taking over some piece of the insurance, and operationally it’s hard to see them doing that on a timely basis. But it would ‘cost’ the govt. a relatively small amount of $ to do that, as first loss would still be the shareholders of the ins. companies, and the govt could insure maybe only 95% of the rest, limiting default losses for bond holders to 5 pts max, for example.

As before, none of this directly alters the real economy, apart from psychological effects that might slow demand for a while. This much like the crash of 87- large financial losses but the real economy muddled through until the Bush tax hikes…

All the best!

warren

Big think: Q and A’s

Response to questions from big think.

Is fiscal responsibility essential to creating a stronger, more prosperous nation, or is the matter overhyped?

Worse, the matter is totally confused. By identity, government budget deficits = ‘non-government’ accumulation of financial assets denominated in that currency.

That means net savings desires of the non-government sectors can only be accommodated by the government’s fiscal balance. (Deficit to add financial assets; surplus to reduce financial assets.)

Therefore, if government deficit spending is insufficient to satisfy the total net savings desires of the non-government sectors, the evidence is unemployment and excess capacity in general, which is also known as a lack of aggregate demand.


There are a plethora of reasons for Americans to work later in life today. It is difficult to live off of Social Security benefits alone, we are living longer and 401(k) plans are far less reliable than traditional retirement plans. So do older members of our society get a fair shot when it comes to employment? What about younger workers? Does youth and inexperience repel employers?

Employers attempt to maximize their profits. That means ‘hiring off the top.’ In other words, they try to hire the best first, and the seemingly less attractive workers get hired last.


What is the most exciting thing going on in business today?

The combination of weak demand, due to world budget deficits being too small, and rising prices of food and fuel, due to the Saudis acting as the swing producer (they are a monopoly supplier at the margin), is creating a highly disruptive ‘stagflation’ condition much like the 70’s.


Where is capitalism failing today?

Capitalism is functioning within the given institutional structure, which includes tax laws, labor laws, govt. spending decisions, contract law, etc.

What needs to change in the system?

The system changes continually with changes in the application of the institutional structure and with the advancement of knowledge on how to use any given structure.

Currently, we have a floating exchange rate system in place, which is capable of sustaining full employment and price stability. This is a major advancement over the previous gold standard, which necessarily resulted in periodic recessions and depressions and allocated real resources to the production and accumulation of gold.

However, we continue to fail to recognize how to sustain sufficient demand for full employment and we fail to utilize techniques of government spending that will promote price stability; so, the promise of floating exchange rates has yet to be realized.


Everyone deserves a fair price for their work,

As a matter of ‘game theory’ if a person has to work to eat and survive, but business only has to hire if it determines it can sufficiently profit by adding employees, it is an ‘unfair game’ biased against workers, and we should expect real wages to stagnate over time.

And this is exactly what we observe.

but should there be caps on CEO salaries?

The corporate structure is part of the general institutional structure, which is producing the seemingly higher than necessary CEO salaries. Simple caps would have other consequences.

More fundamental changes to the institutional structure are needed to put incentives in place for alternative distributions of incomes.

Is it fair to lay off workers when your own salary is worth tens of millions of dollars.

At the macro level, with sufficient aggregate demand to ensure full employment, efficiency increases total output. Therefore layoffs without production cuts potentially benefit the entire population.

However to get that outcome, the current institutional structure has to be adjusted to include the necessary incentives.

Or, does the market require high salaries to retain the highest quality leaders and the lifestyle they must lead in their high risk jobs?

No. The reason for the high CEO salaries is a function of the corporate structure that includes the legal arrangements between shareholders, board of directors, and management. It is the resulting interaction that will continue to push up CEO salaries.


Is war the biggest growth economy? It pours unknown amounts of wealth from around the world into technology, man power and manufacturing as well as using up, or destroying a great deal of natural resources.

Again, this is the result of institutional structure which is currently providing the incentives that give us the observed results.

And the situation is actually much worse than described above.

Current tax and other elements of fiscal policy are supporting biofuels. The result is that we are directly and indirectly burning up our food supply for fuel. This is already creating food shortages which have the potential to kill more people than were killed in World War II over the next few years.

How many people have an income either directly or indirectly derived from armed conflict? Since the industries that profit from the various aspects of war have become so vast and dependent on world wide struggles, will they ever let the world create peace?

First, biofuels will kill tens of millions over the next few years if nothing is done to stop that process. That is far higher than any of the current wars.

Second, the lack of understanding of the application of fiscal policy to ensure full employment and price stability is contributing to
regional conflicts.

Third, profiting from war is an example of how institutional structure functions channel economic resources. The outcomes are a function of the structure.


Are you worried about America’s economy?

Yes, I see weaker demand, supported by rising exports that diminish demand in the rest of the world, while inflation accelerates due to imperfect competition in the production of crude oil.


♥