Category Archives: USA

Responses to comments on the ‘Comments on Brian Wesbury article’ post

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Post: Comments on Brian Wesbury article

Comment by ‘Hoover Printing Press‘:

Warren congrats on your new website.

Thanks!

I keep reading that the bond insurers have let banks keep lots of “accounting issues” off the books – thus affecting tier 1 capital requirements – currently to the banks advantage. Without the bond insurers and their AAA rating by moody and sp (fitch has already lowered ratings down from AAA) the banks will have to scramble for lots of capital without the insurance, barclays recent estimate upwards of 150 billion. I remember Buffet referring to Financial WMD’s.

Yes, but that’s a matter of institutional structure. The government has several options.

For example:

  • The government could change bank ‘haircuts’ to capital by allowing AA insured bonds to have the same or only marginally higher capital charges as AAA bonds. The capital requirements are somewhat arbitrary to being with and meant to serve public purpose.
  • The government could offer some for of supplemental insurance at a fee to investors holding the AAA insured bonds in question. Again, for example, the fee could perhaps be 1%, and the government could guarantee a price of 97 to any investor who paid the fee. The government will probably make a profit on this type of program, as the monolines’ capital will still be in first lost position, and even if they are downgraded to AA, the implication is they will have more than sufficient capital to cover all losses. That is what AA means.

I read articles that NY is in a mad scramble to get buffet and others to bring some assurances to the bond insurance industry because the muni debt market is going to seize up without bond insurance and what the AAA ratings of that insurance lends to capital requirements and “accounting issues.”

Yes. There are some institutional ‘land mines’ in place that the government can either prevent from being tripped or defuse directly (for a fee), as above.

In hoover’s time I remember reading from Rothbard’s great depression I believe that he printed but the banks used the money to shore up their reserves, they did not want to lend and spur the economy at the cost of their own survival.

Under that gold standard regime, the government was limited in what it could do. Deficit spending carried the risk of loss of gold reserves, for example. And, in fact, the US was forced off the gold standard in 1934 domestically and devalued for foreign holders of $. This was the only actual default in US history.

So why is Bush and congress giving joe six pack 150B when he could have used that to back the bond insurers and the banks?

No comment.. You must be new here??? :)

Possibly getting the ratings agency to save some face and for fitch to bring AAA ratings back to the bond insurers?

Or the supplemental plan, above, that doesn’t bail out the insurers.

On another point, you claim a large difference between hoover’s problems and our problems today is the gold standard and floating exchange rates. Unfortunately I must press you as to how that is so when the folks at the top of this chart (china) http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance have fixed exchange rates relating to the folks at the bottome of it (USA). Soros is claiming the USA will soon lose reserve currency status.

A fixed exchange rate ‘forces’ you to run a trade surplus to sustain sufficient reserves of gold or the reserve currency of choice. It also limits the ability to conduct countercyclical deficit spending as that leads to loss of reserves and default/devaluation/etc.

China has a ‘dirty float’, which means the currency is not convertible, but instead they intervene at various prices.

Not at all the same thing.

I am not so sure the Euro will be able to weather a global financial meltdown and perhaps in economic warfare, keeping reserve currency status is worth fighting over.

What is it, and why do you care?

With bush selling lots of scatter bombs to the house of Saud, at least we are trying to keep friends who have control over oil.

Still with the USA’s current account balance the worst of any country on the planet,

Imports are real benefits, exports real costs. In general, the larger your trade deficit, the higher your standard of living.

40K nukular bombs and a war machine that eats up large domestic resources, and a consumer base whose only skill is to shop till princess drops,

Consumption is the only point of economics.

I am not so sure what you are trying to save to get USA to deficit spend even MORE?

Right now, more deficit spending of the type proposed will mainly increase inflation.

Would it be so bad if that guy “dfense” from the mike douglas movie “FALLING DOWN” gets put out of a missle building job and starts fishing on the dock of the bay wasting time?

Comment by Scott Fullwiler:

Wesbury’s basically a monetarist (everything that goes wrong is the Fed’s fault for creating either too much or too little “liquidity”) operating with a gold standard model.

Yes, that’s where we don’t agree on causation and risks. But interesting that even in that paradigm, he doesn’t see the risks the Fed does, as they are in the same gold standard paradigm.

That said, he’s been bullish on the economy since 2002, and he’s been mostly right in that, except that he’s also been saying inflation is right around the corner since then, too, given weak dollar, strong gold.

And I’ve seen inflation underway due to Saudis acting as the swing producer and hiking price continuously.

And I see the weak $ as a change in preferences of non-resident holdings of financial assets.

Until a year and a half ago he was also claiming that the large spread b/n st and lt Treasuries was another a sign of inflation,

And I say it’s a sign of what investors think the Fed will be doing next. So to that extent, the curve reflects investor expectations. But there is also a lot of institutional structure that steers maturity preferences; so, the result is a mix of the two.

though he decided bond markets were being irrational once the yield curve inverted (again, if inflation is right around the corner).

Again, that reflects investor expectations.

I’ve used him in my classes for several years as a “balance” to the Levy view of “debt deflation’s around the corner.” Interesting to see that you and he are on the same page now at least regarding state of the economy, since you’ve been pessimistic (at least in long run, given small govt deficit) while he’s been a non-stop bull.

Yes, I’ve been expecting lower domestic demand since the financial obligations ratio go to where it go in Q2 2006, due to the shrinking budget deficit. What I missed was how strong exports would be, mainly on our three pronged weak dollar policy that has been scaring foreigners away from holding $US financial assets.

This includes calling CB’s currency manipulators if they buy $US, aggressive Middle Eastern policy, and the Fed’s apparent lack of concern for the value of the currency (inflation). Fundamentally, the falling budget deficit is good for the $US, but technically government policy has triggered an ‘inventory liquidation’ over seas that is causing exports to boom.

And now we are learning the hard way (or should be) what an export driven economy looks like – weak domestic demand due to high prices and full employment as we build goods and services for others.

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Comments on Brian Wesbury article

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He’s got the data right, and I agree with all he concludes from it. All he’s missing is the difference he points two between now (unlimited funds available) and The Great Depression (banks short of lendable funds), including what the Fed presumably ‘did’ each time, are the differences between the constraints of the gold standard of that time vs today’s floating fx policy.

The Economy Is Fine (Really)

by Brian Wesbury

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.

It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.

A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year — real GDP expanded 4.4% at an annual rate between April and September.

With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.

Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications.

Some large companies outside of finance and home building are reporting lower profits, but the over-reaction to very spotty negative news is astounding. For example, Intel’s earnings disappointed, creating a great deal of fear about technology. Lost in the pessimism is the fact that 20 out of 24 S&P 500 technology companies that have reported earnings so far have beaten Wall Street estimates.

Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%. This was true before recent rate cuts and stimulus packages. Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown. The biggest threat to the economy is still inflation, not recession.

Yet many believe that a recession has already begun because credit markets have seized up. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire “house of cards,” otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown.

For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problems spread like wildfire.

This outlook is both perplexing and worrisome. Perplexing, because it is hard to see how a campfire of a problem can spread to burn down the entire forest. What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets.

Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.

In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover’s tax hike passed in 1932, and then FDR’s alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%.

But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.

These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.

Which brings up an interesting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to build a better system that is stronger and more reliable.

Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.

The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it’s the development that investors should really worry about. It reads just like the 1970s.

The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying, and there is
still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. Dow 15,000 looks much more likely than Dow 10,000. Keep the faith and stay invested. It’s a wonderful buying opportunity.

Mr. Wesbury is chief economist for First Trust Portfolios, L.P.

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Gasoline demand

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this doesn’t look like the stuff of recession:

FUNDAMENTALS TO SUPPORT

Barclays Capital said gasoline demand indications from the U.S., the world’s largest consumer, have been robust.

“Gasoline is showing the strongest year-on-year growth in demand for January-to-date,” it said in a research note.

“In each of the past six years, February has marked the start of a run of six months of consecutive month-on-month gasoline demand increases, and we have no reason to expect 2008 to break that pattern.”

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Rebate discussion comment

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Lots of talk that rebates from Congress will be spent on imports and therefore not help US economy.

Wrong!

Yes, most spending will be on imports.

But non residents are now spending their ‘hoard’ of $US financial assets on our goods and services (aka, US exports).

If anything, the rebates will further reduce the desire of non residents to accumulate $US financial assets.

This means exports will probably increase even faster than we can buy foreign products with the rebates.

The media continues to get it wrong and be part of the problem rather than part of the answer.

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2008-01-25 Balance of Risks Update

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Mainstream economics would put it this way:

  • Inflation risk to long term growth vs short term growth risks

So on the inflation side:

  • CPI year over year up to 4.1%
  • Core CPI 2.4% year over year, 2.9% month over month (2.5% high end of Fed’s comfort zone)
  • Headline PCE deflator 3.6% year over year, core PCE 2.2% (1.9% upper band of their target forecast)
  • PPI up 6.3% year over year, core up 2.0% year over year
  • Crude back to $91 after a brief hiatus (‘high eighties’- relax, only attempt at a pun)
  • CRB testing new highs
  • Grains near the highs
  • Import prices up 10.9% year over year, ex petro up 2.9%, reversing years of pre 2003 declines
  • Export prices up 6.0% year over year
  • Prices paid/received remain on the rise in the various surveys
  • $US index reasonably flat, but other currencies experience domestic inflation
  • Not that anyone cares, but gold is at $913
  • 5 year, 5 years forward implied CPI at 2.51%, vs 2.43% at December 18 meeting

And on the growth side:

  • Housing reports remain weak through the winter months – permits still falling
  • November construction spending up 0.1%
  • Mortgage applications moving higher, 4 week moving average down 2.7% year over year, up 8.5% from November 2006 lows
  • November income and spending (1.1%) came out strong, Oct revised up (0.2% to 0.4%), after December 18 meeting
  • November durable goods on the weak side; December out on Tuesday
  • ADP up 40,000, payrolls up 18,000, unemployment up to 5% from 4.7%
  • Initial claims since meeting: 357K, 334K, 322K, 302K, 301K. Possible seasonal issues but no obvious weakness
  • Continuing claims since meeting: 2,754,000; 2,688,000; 2,747,000; 2,672,000. Still a bit higher than before, but not moving up.. yet
  • November trade gap out to 63.1 billion. December numbers released February 14
  • Fiscal balance: Receipts up 5.7%, spending up 8.8% (with labor day distortion) fiscal year over year
  • December vehicle sales 16.3 million, flat since August
  • December retail sales down 0.4%, core up 0.1% month over month, year over year up 3.2%, core up 3.0%
  • December industrial production flat, up 1.5% year over year
  • GDP and ADP at the meeting, payroll forecast up 65,000 on Friday
  • Fed cut 0.75% coincident with the Soc Gen liquidation related equity weakness
  • February Fed Funds futures now at 3.09%, not fully discounting a 50 cut. Got all the way to 3.15 before stocks sold off.

Market functioning:

  • LIBOR vs Fed Funds under control, 3 month LIBOR down 160 bp since December 18 meeting, TAF functioning well
  • Mortgage spreads still historically wide, but trading, and absolute yields also down since Dec 18 meeting
  • Mtg refi’s way up

Fiscal package is on its way!

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Re: BTIG Earnings Recap for January 23, 2008

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(an email)

On Jan 23, 2008 8:51 PM, Joshua wrote:
>
> Economy is in dire condition?!?!?! Look at today’s earnings reports and
> forecasts…anecdotal, but not so dire at all!

Yes, they’ve been forecasting recession for about a year and it keeps getting put off a quarter.

Now the term is morphing to ‘growth recession’ which mean growth slows for a few quarters.

Hardly the stuff of rate cuts for a mainstream economist when inflation is ripping.

warren

> Subject: BTIG Earnings Recap for January 23, 2008
>
> Stocks staged a late day rally (biggest in 2 months) on a report NY
> regulators met with banks to discuss aid for bond insurers. Trading on
> earnings (6:15pm): COF +0.30 (+0.7%), CTXS -1.02 (-3.2%), EBAY -1.63
> (-6.7%), FFIV +3.91 (+19.4%), GILD -0.81 (-1.8%), ISIL -0.72 (-3.1%) , NFLX
> -0.06 (-0.25%), PLCM +1.72 (+7.7%), QCOM +2.67 (+7.3%), QLGC +0.17 (+1.3%),
> SANM +0.04 (+2.8%), SYMC +1.40 (+9.1%) and WDC +1.36 (+5.5%). Expected to
> report in the morning: ABC, BAX, COL, CY, DHR, ED, F, HSY, KMB, LCC, LMT,
> MHP, NOK, NOC, NUE, POT, RESP, SPWR, T, TXT, UNP and XRX. Economic data for
> tomorrow includes Initial Claims for 1/19, December Existing Home Sales and
> Crude Inventories for 1/19.
>
> TickerAnnouncementNote
> AMCC+ 1c better, revs better
> AVCT+ 10c better, revs inline
> BKHM+ 5c better, revs betterguides Q3 revs inline
> CAVM+ 1c better, revs better
> CBT+ 24c better, revs better
> CHIC+ 1c better, revs inlineguides Q2 EPS inline
> CNS+ 2c better, revs better
> CTXS+ 6c better, revs betterguides Q1 inline, FY08 inline
> GILD+ 1c better, revs inline
> HXL+ 1c better, revs betterguides FY08 inline
> ISIL+ 1c better, revs betterguides Q1 EPS, revs inline
> KNX+ 1c better, revs better
> LSI+ 6c better, revs betterguides Q1 inline
> MOLX+ 2c better, revs betterguides Q3 EPS inline, revs above
> NFLX+ 10c better, revs inlineguides Q1 EPS inline, revs above; FY08 EPS
> above, revs inline
> NVEC+ 6c better, revs better
> PLCM+ 3c better, revs better
> PLXS+ 2c worse, revs inlineguides Q2 EPS above, revs above
> PRXL+ 1c better, revs betterguides Q3 EPS inline, revs above; guides FY08
> EPS, revs above
> QLGC+ 3c better, revs better
> QTM+ inline, revs lower
> RGA+ 6c better, revs lowerguides FY08 EPS above
> RKT+ 4c better, revs better
> RYL+ 53c (ex-items), vs loss of 17c (First Call), revs better
> SANM+ 1c better, revs betterguides Q2 EPS inline, revs above
> SXL+ 10c better, revs better
> SYMC+ 4c better, revs betterguides Q4 EPS above, revs above
> TSS+ 3c better, revs inlineguides FY08 above, revs inline
> VAR+ 3c worse, revs betterissues Q2, FY08 guidance
> VARI+ 2c better, revs better
> WDC+ 31c better, revs better
> EFII= inline, revs inlinereaffirms Q1 guidance
> FFIV= inline, revs inlineannounces share repurchase up to $200mln
> SRDX= inline, revs better
> ACXM- 2c worse, revs lowerissues FY08 guidance
> CBST- 1c worse, revs inline
> CLDN- 1c worse, revs better
> COF- 3c worse, revs lower
> DGII- 3c worse, revs inlinereaffirms FY08 inline
> EBAY- 4c better, revs betterguides Q1 EPS, revs below; FY08 EPS inline, revs
> below
> MRCY- 9c better, revs inlineguides Q3 EPS, revs below, FY08 EPS, revs below
> MTSC- 10c worse, revs betterreaffirms FY08 guidance
> NE- 1c worse, revs inline
> PSSI- 1c worse, revs inlinereaffirms FY08 EPS guidance
> PTV- 2c better, revs betterguides Q1 EPS below, FY08 EPS, revs inline
> QCOM- 1c worse, revs betterguides Q2 EPS, revs inline; reaffirms FY08 EPS,
> guides FY08 revs inline
> RJF- 11c worse, revs lower
> SOV- 4c worse
> SYK- inline, revs betterguides FY08 inline
> WSTL- loss of 4c vs loss of 6c (may not be comp), revs slightly betterguides
> Q4 below
>

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Summary of subprime bank losses

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Spread around enough so no one went out of business, and most lost less then a quarter’s worth of earnings. And a chunk of it probably recoverable.

It’s been a year and the total has to be at the low end of expectations, but could be a lot more to surface in a lot of small pieces around the world.

Seems that only when the Fed sees signs of general progressive improvement vs the current perception of continuing deterioration will they stop cutting.

Subprime Bank Losses Reach $133 Billion, Led by Merrill: Table

by Yalman Onaran

Jan. 22 (Bloomberg) The following table shows the $133 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 20 of the world’s largest banks and securities firms.

The charges stem from the collapse of the U.S. subprime mortgage market and its repercussions on the rest of the housing industry. The figures, from company statements and filings, incorporate some credit losses or writedowns of other mortgage assets caused by subprime crisis.

Analysts estimate additional writedowns and credit losses of $23.5 billion, which would bring the total to $157 billion. All figures are in billions and are net of financial hedges the firms used to mitigate their losses.

*T

Firm Writedown Credit Loss Total
Merrill Lynch $24.5 $24.5
Citigroup 19.6 2.5 22.1
UBS 14.4 14.4*
HSBC 0.9 9.8 10.7
Morgan Stanley 9.4 9.4
Bank of America 7 0.9 7.9
Washington Mutual 0.3 6.2 6.5**
Credit Agricole 4.9 4.9*
Wachovia 2.7 2 4.7
JPMorgan Chase 1.6 1.6 3.2
Canadian Imperial (CIBC) 3.2 3.2**
Barclays 2.7 2.7*
Bear Stearns 2.6 2.6
Royal Bank of Scotland 2.5 2.5*
Deutsche Bank 2.3 2.3
Wells Fargo 0.3 1.4 1.7
Lehman Brothers 1.5 1.5
Mizuho Financial Group 1.5 1.5
National City 0.4 1 1.4
Credit Suisse 1 1
Nomura Holdings 0.9 0.9
Societe Generale 0.5 0.5
Japanese banks
(excluding Mizuho, Nomura)		 0.8 0.4 1.2
Canadian banks
(excluding CIBC)		 1.4 0.1 1.5
____ _____ _____
TOTALS*** $107 $26 $133

* Includes losses the company expects to report in the fourth quarter of 2007.
** Includes losses the company expects to report in the first quarter of 2008.
***Totals reflect figures before rounding.
*T

–With reporting by Samar Srivastava in New York, Doug Alexander in Toronto. Editors: Steve Dickson, Dan Kraut.

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Meltdown?, continued..

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Weakness:

  • Equity markets still heading down.
  • Commodity markets anticipate slowing demand.
  • Credit markets anticipate additional rate cuts.

First, a word on the bond insurers:

A Fed rate cut won’t address the risk that an insurer failure could trigger panic selling by bond holders that require AAA ratings to hold their bonds.

The Fed could offer to provide supplemental insurance to investors holding the bonds for a fee (maybe a point), and discount the strike of the put a few points as well. The insurer would continue in first loss position. This would allow investors to ‘pay the price’ to the Fed if they want to keep the AAA rating. Additionally the Fed would take measures to make sure this doesn’t happen again.

Second, commodity markets:

Story today that OPEC still sees demand increasing 1.3 million bpd, even with a slowdown. Not good. Means they retain pricing power.

The unknown is whether they agreed to cut prices in response to the Bush visit.

Third, equities:

Dupont earnings way above expectations on world demand, and price increases on their cost side were more than passed through.

And bank earnings off but all still in positive territory for Q4, indicating losses during what is likely the largest quarter for writeoffs were less than earnings. I’ve seen worse…

Equity markets relatively flat from yesterday, earning look good, particularly ex financial writedowns, as core earnings of the financials look OK as well.

One of the problems with equities continues to be shareholder vulnerability to converts and other dilutions as corporate structure/law rewards management for this kind of recapitalization. This shifts wealth from existing shareholder to new shareholders.

Initial claims estimated at 325,000 for Thursday. If so, I still don’t see much damage to the real economy. Q4 may sink or swim on December export numbers that will be released in February.

The jobless recovery ends with a full employment recession?
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Re: media influence

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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
>

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2008-01-21 Update

Posted on by

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.

♥

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