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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Bernanke describes jobless recovery

Posted by WARREN MOSLER on February 23rd, 2009


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Yes, and this is a massive political risk.

The deficit is getting large enough to stabilize the economy at high levels of unemployment.

With flat employment growth, and 2% productivity growth, real GDP grows at 2% and unemployment stays north of 8%.

And the equity markets are in a very good place with costs under control and sales stabilized and rising.

So the financial sector booms while the real economy stagnates.

And fuel prices move higher as well.

Bernanke Offers Jobless Recovery as Humphrey-Hawkins Hopes Fade

by Craig Torres

Feb 23 (Bloomberg) — Bernanke Offers Jobless Recovery as Humphrey-Hawkins Hopes Fade delivering semiannual testimony required in legislation written by the late lawmakers, will describe a U.S. economy returning to growth next year without generating many new jobs. Even with credit markets thawing, Fed officials see unemployment persisting at 8 percent or higher through the final three months of 2010.


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11 Responses to “Bernanke describes jobless recovery”

  1. zanon Says:

    WARREN: What’s the mechanism for the financial sector booming while the rest of the economy stagnates? Is it just that all the Gov transfer eventually will show up as earnings, and PE is currently very low?

    Is it that high unemployment will increase corporate profits as they can keep down wages?

    What I’m struggling with is the lack of AD that high unemployment causes. I cannot see HH demand for loans or goods, and I can see higher energy prices further depressing non-energy AD. None of these bode well for financials or non-financials.

    I think Japan may be instructive here. They have low unemployment (for cultural reasons) so there this has manifested itself as lower *quality* of employment (recent NYTimes article detailed how much of Japanese employment was for temp jobs). The Nikkei has been down now for over 25 years. I don’t know how Japanese banks have been doing, but anyone who invested after their crash has been very disappointed.

    Reply

  2. warren mosler Says:

    good questions.

    First, banks that survive have less competition, as many non bank lenders have dropped out of the picture and the Fed will drag its feet on raising the cost of funding for its member banks. Even now spreads have widened dramatically between interest earned on bank lending and the funding costs of those loans.

    When the economy has recovered to the point of modest gdp growth that means sales will be rising for most companies while right now equity markets are pricing in falling sales and potential insolvency.

    Look at GE and an example at $9 per share with a dividend of 1.20.
    (I own a few shares I wish I hadn’t bought). It’s priced for falling earnings, dividend cuts, etc. If the economy goes flat to up some, it will get priced for flat to rising earnings and no dividend cut or maybe a one time, smaller dividend cut. At a price of 30 the stock would still yield 4% which is still high. So even a very modest recovery that only returns us to very slow growth without an increase in total employment can result in those types of stocks doubling in value.

    And that means the fees for money managers double as they get paid based on asset value. Brokers and traders will see large volume upticks. M and A will also return big time as cash flow goes positive for the industry.

    With the end of the contraction commercial property also gets priced for stability rather than collapse. Municipal finance comes back aggressively, as does finance of all kinds as cash flows improve.
    Depleted inventories of all kinds build, further increasing the demand for finance. Insurance comes back as well. And many of the government spending programs drive increases in finance for the supporting businesses.

    etc.

    Reply

    jcmccutcheon Reply:

    GE just cut their dividend by about 60%.

    Reply

  3. zanon Says:

    Hi Warren:

    Thanks for your example. GE is a great example of, what is essentially a financial stock, but not a bank.

    A couple of areas of pushback.

    1. Why has this mechanism not worked in Japan? It’s been 25 years, their corporate sector is not bad, but we’ve seen no improvement in the Nikkei at all. US policy is combining zombie banks, higher taxes, and wasteful “infrastructure” spending, just like the Japanese. So why did your scenario not play out there?

    2.By historic ratios, PE is still high. Even a trailing average of 10 years PE is high. Why is the past 10-15 years of US equity (and debt accumulation) being taken as the standard, and not the 40+ years before that?

    I agree with you that banks are pro-cyclical. I just don’t see the non-bank private sector turning up as fiscal headwinds increase.

    Reply

    warren mosler Reply:

    Japan never did enough fiscal to go positive, just enough to prevent a big negative. their ‘savings desires’ due to institutional structure allow a lot less in taxation for a given amount of deficit spending, and it seems to scare them.

    Fiscal tailwinds increasing, actually, right? most forecasts are for slightly positive growth in q3 from what i’ve been hearing?

    And while GE cut its dividend over concerns of funding itself, it’s net interest margins have to be very high and its infrastructure businesses on the verge of a tidal wave of govt. funding? same with most of the s and p?

    Reply

  4. Jim Baird Says:

    “M and A will also return big time as cash flow goes positive for the industry. ”

    I could see a repeat of the 80′s age of corporate raiders, if stocks once again get sold below their breakup value…

    Reply

  5. zanon Says:

    JIM: The corporate raiders of the 80s created profits by taking on leverage, taking out costs, and at least maintaining revenues. So long as revenues stay flat this works, but in a declining AD (revenue) environment it will bankrupt the firm.

    Reply

    warren mosler Reply:

    exactly, and all is priced for declining revenues.

    should revenues flatten out in q2 and turn up even very modestly valuations are suddenly way low.

    Reply

  6. zanon Says:

    WARREN: “Way low” compared to what? The last 5 years — yes. The last 50 years, no.

    http://bespokeinvest.typepad.com/bespoke/2008/05/sp-500-historic.html

    Historic PE on S&P 500 is 18. We’re currently at about 20. Not a screaming buy.

    I’m not offering investment advice, I’m simply pointing out that, looking at current PE vs historic does not make a strong case to enter equity indices right now. You say that equities have priced in declining revenues. The numbers don’t support that, equities are currently forecasting average growth. This is not to say that stocks won’t rise on flat earnings! Financials, in particular, have declined dramatically and may be buys.

    Reply

  7. warren mosler Says:

    with psychology this universally negative my guess is that stocks are ‘priced to worst’ and, as you state, even a return to flat earnings with prospects for improvement will result in substantially higher valuations.

    There has also been something at work i described a while back- the fact that when things start to go bad the institutional structure incents management to punish their shareholders to sustain the enterprise for them to manage.

    This isn’t a problem if you buy the whole company, which is already starting to happen and should quickly grow as ‘finance channels’ for m and a present themselves, as they necessarily do.

    Reply

  8. zanon Says:

    WARREN: Good point on M&A. Spoke to a private equity friend of mine, and they don’t see deal opps right now. Equity prices and borrowing costs remain too high. I asked what “too high” meant, and they said “long term average”.

    The Obama administration may very well channel 2000-2007 interest rates to private equity firms so they can buy companies, load on debt, fire people, and enrich themselves. Certainly a time to buy those stocks.

    Reply

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