Empty Storefronts Repurposed

If you've been following the financial media, you know that the commercial real estate sector is in trouble. Its basically following the trajectory that the residential real estate market did. Although, to be fair, the commercial real estate mortgage backed securities (MBS) market is much smaller than the residential MBS market is. Regardless, it looks like banks are poised to take another hit thanks to loan defaults. Of course, this all translates into empty storefronts so communities everywhere end up taking a hit.

Blogger Matthew Yglesias wonders why down markets don't result in unused urban storefronts being rented. He concludes that regulation might be partly responsible. Megan McArdle over at the Atlantic responds to Yglesias's post. Interestingly, she mentions a few reasons why malls might fare better than urban storefronts in this recession.

How are some empty stores being repurposed? Some are being used as street-front ad space. Others are being transformed into churches. Pretty interesting stuff.

How is retail doing in your community? Noticed any major changes or transformations?

Is the U.S. Making a Profit Off of it's Bailouts?: Media Spin and Reality

Today, the New York Times presents us a lovely piece of journalism entitled "As Banks Repay Bailout Money, U.S. Sees a Profit," written by Zachery Kouwe. What an optimistic title! Then we read the first two paragraphs:

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

Wow! That's great, right? Then the "buts" begin ....

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

So, this article reports that the U.S. has earned about $4 Billion in profit from the TARP program. At the same time, the trillions of dollars in other bail-outs, the stimulus program, and the rest of the TARP program have yet to produce much of any kind of positive return. In other words, the overall picture is still negative but you wouldn't be able to deduce that based on the headline and tone of this article.

The naked capitalism blog calls out the New York Times (and the Financial Times, which published a similar story) on their transparent attempts at spin.

In a simply remarkable coincidence of timing, the New York Time running a story with the very same message, namely that bailouts are good for taxpayers because the Treasury has made money on the TARP.

If you believe that, I have a bridge in Brooklyn I’d like to sell you. The fact that we have such patent garbage running as a front page New York Times story says either the reporter and his editors lack the ability to think critically (or find sources who could do that for them) or that we have a controlled press. Given that subscriber-driven Bloomberg has even fallen in line, I am inclined to the latter view, but I am still curious as to how this has been achieved. Is this the price of access journalism, or is something more pernicious at work?

Naked capitalism refutes the idea that the TARP program is transforming into a profitable venture for the federal government:

A quick but not conclusive search suggests that only a small portion of the TARP has been retired, so it is wildly premature to declare victory.

In fact, another source looked at the TARP as of June and estimated that it had lost $148 billion, and had lowered loss total as a result of the repayments. Now bank stocks have rallied since then, but the biggest contributors to the red ink, namely AIG and Citigroup, are not in any better shape fundamentally than they were then. Indeed, the fact that new AIG CEO Robert Benmosche has in a remarkable show of hubris, effectively told the US taxpayer to stuff it, AIG has the dough and is in no particular hurry to return it, nor does it care what the public or Treasury wants, its demands are unreasonable. I wouldn’t hold my breath about having the loans repaid.

I don't want to leech any more of naked capitalism's post, so I encourage you to go over there and read for yourself, there is much more. Another, similar post from earlier in the day can be found by clicking here.

Debt Deflation and False Dawns

There's a debate raging in the financial world right now over whether the biggest threat to the American economy's health is deflation or inflation.

Off to the top left of the screen you'll see a poll I put up asking that very question. Please vote, if you feel inclined.

Today, somebody linked me to a rather old article from January of this year. Its an interview of economist Dr. Lacy Hunt by the Business Spectator publication from Australia. You can find the article here.

Despite the fact that it was published over half a year ago, I felt strongly compelled to share this article with my readers because it presents a coherent, cogent argument that not only supports the case for deflation but, if true, puts the broader economic picture into sharper focus.

Dr. Hunt essentially argues that:

1. We are entering a period of deflation. Debt deflation to be exact. Other historical instances of debt deflation include (a) the U.S. during the 1870s-1880s, (b) the global Great Depression of the 1930s, and (c) Japan, beginning in 1988 and continuing until the present.

2. What pulled the U.S. out of its debt deflation during the Great Depression was its participation in World War II and not President Roosevelt's New Deal program. Furthermore, the Japanese have also run stimulus programs funded by large deficits over the past two decades which have led to minor, cyclical growth but which have been unable to shake off the stronger, overall deflationary trend.

3. Debt deflation lasts a long time. The deflationary period beginning after 1873 in the U.S. lasted approximately 20 years. The Japanese debt deflation that begin in 1988 is ongoing until today. As a side note, her argument is corroborated by a report from Friday which states that Japan experienced record year-over-year deflation of 2.2% in July. Click here to read a report on this development from Bloomberg. Hunt comments that in her view it is quite possible that we're entering a 15-year deflationary period right now.

4. The markets are very susceptible to what she calls "false dawns." I'll let her explain it:

Well, one of the things that has happened in these debt deflations is you get a number of false dawns. People believe that the normal business cycle is going to take control and you're going to get a cyclical recovery and the model that soon prevails is that you get three to 10 years of expansion. You have one year, maybe a year and a half of a recession or nasty economic conditions, but after a year and a half at most, the economy then has another expansion for 3 to 10 years.

When we have these very rare debt bubbles occurring at these long irregular intervals, the normal business cycle model doesn't really apply. We do get some false dawns. Some intermittent cyclical recoveries but the unwinding of the debt process proves to be very very long and difficult. One of the reasons for that is that borrowers don't know anything about paying back loans in harder times, which is what's now beginning to occur and as a consequence there is a major behavioural shift or there has been historically in which consumers decide to live inside of their means as opposed to living outside of their means and normally the saving rate goes up for a long time.

Keep in mind that this was published on January 30th of this year, when the Dow Jones Industrial Average closed at 8,000.86 points. Today (August 30th, 2009) the DJIA closed at 9544.20 points[1]. This backs up the argument I and others have made that the current rally is unsustainable. Nouriel Roubini refers to it as a "dead cat bounce" while Dr. Hunt refers to it as a "false dawn," but the premise is the same.

5. The government stimulus program is not working and actually may be making things worse. She states:

The most recent academic research that I have seen, published in 2008, indicates that the multiplier on government expenditure is just close to zero. If the government spends an additional dollar it has to fund that dollar either by raising taxes on the private sector or borrowing funds in the capital markets that would have gone to the private sector. Government spending, the government sector in the US, the productivity is at best zero and perhaps slightly negative, so when we enlarge the government sector and shrink the private sector we reduce the growth, potentiality, of the US economy. We shrink the pie and we make things worse off.

She thinks the TARP program could have gone another, alternative way:

The alternative, which the Japanese would have done and the better way to go, is to use the treasury borrowing capacity to protect the depositors and the customers of the banks and the insurance companies and perhaps extend unemployment benefits for their employees that are laid off. Zombie-like institutions intact with wholesale federal dollars, borrowed federal dollars – those institutions are really not able to grow or contribute to the economy. If instead we had protected the savers and the depositors, then institutions would have failed, but the healthy banks and insurance companies would have taken over the business of the institutions that made the mistakes and then we would have a growth trajectory going forward. So it's quite possible that the actions that we've taken and cost hundred of billions dollars, hundreds of billions of dollars have actually not helped the situation and may have had severe unintended negative consequences.

6. The U.S. trade deficit is narrowing and may be eliminated in the next few years.

She also has some advice for investors, but I'll let you visit the site and read for yourself. Overall, I thought Dr. Hunt presented one of the most compelling arguments in favor of deflation. She managed to fit her take on the current crisis into a coherent historical context and made some predictions that are strongly supported by the current financial data available.

Sources:

1: http://finance.yahoo.com/q/hp?s=^DJI&a=00&b=30&c=2009&d=07&e=30&f=2009&g=d

Desperate Investors Embrace Risky Moves

The other day, I wrote about economist Nouriel Roubini and the on-going stock market rally. I opined that I thought the rally was the result of investors putting aside worries about risk and making short-term investments in the stock market because its one of the few investments out there that offers the prospect of any kind of considerable returns. My overall point was that, because of this fact, the stock market should not be taken as an accurate gauge of the U.S.'s economic health. Furthermore, we're likely to see considerable volatility in the markets because of this phenomenon.

It turns out that the Los Angeles Times has published an article that pretty much directly echoes everything I said. You can read the article here.

I won't paste the whole article, but here are some important excerpts to give you an idea of what I'm talking about.

First, the opening paragraphs:

Stung by punishing losses in the bear market, some individual investors are souring on traditional buy-and-hold investing in favor of aggressive trading aimed at scoring big gains. ¶ Trading at online brokerages has soared in recent months as investors have tried to capitalize on rising securities markets. But individual investors increasingly are embracing strategies that carry outsized risks. ¶ In some cases, for example, investors have ventured into a relatively new type of investment product designed to magnify the movement of the underlying markets. That can sometimes yield big gains if investors bet correctly but bruising losses if they don't. ¶ To critics, the push into aggressive trading is the equivalent of doubling down at a casino to recoup earlier losses. ¶ "It would be a terrible tragedy if people try to recover from the devastation of the financial crisis by creating even more devastation in their personal investment accounts by taking on risks they don't understand and can't afford," said Barbara Roper, director of investor protection for the Consumer Federation of America.

The "relatively new type of investment product designed to magnify the movement of the underlying markets" that they're referring to are ETFs or Exchange-traded Funds. The article continues:

Susan York was fed up with the dismal performance of her 401(k) retirement account. Then her husband saw a Sunday morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at pre-determined prices.

The 50-year-old from Naples, Fla., had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40% a month and is trading full time.

"It's the best job I've ever had, not just for the enjoyment but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income."

Trading activity at online brokerages jumped in the second quarter as the stock market began rebounding in early March from its deep sell-off. Compared with a year earlier, activity was up 28% at E-Trade Financial Corp. and 36% at TD Ameritrade Holding Corp.

The article continues to state that apparently some ETFs are being sued by investors for being misleading. Overall, a pretty interesting article that makes a lot of things clearer. I think this article ultimately corroborates my assesment that the stock market is not an accurate measurement of the real American economy's health at the moment.

What I'm Reading

"Ultimate Crisis Still Coming"
Analyst Marc Faber believes that the ongoing rally is the result of excess liquidity pumped into the economy by central banks. He predicts a year to 18 months of market rally followed by a "ultimate" crisis that will "clean" the system. He advocates firing half of global government workers as one radical solution.

"If you pump money into the system and you create large fiscal deficits, you create volatility," Faber, author of the Gloom, Boom and Doom Report, told CNBC in remarks reported on its website.

"We've seen an intermediate low in March, we'll rally for a year or so or maybe 18 months -- the ultimate crisis will happen much later, and the ultimate crisis would clean the system," he added.

Faber, who did not forecast a precise time for that crisis, told CNBC that firing half the government workers in the world would be one way of dealing with the crisis.

"If you shift government activity to the private sector the economy becomes more dynamic," Faber said.

More Bank Failures Coming?
An analyst by the name of Richard Bove at Rochdale Securities (whom CNBC identifies as a "prominent banking analyst") is predicting a possible 150 to 200 further bank failures in the U.S. 81 banks have already failed in 2009.

Doubts About Dollar Continue
There is nothing new in this article. It simple summarizes why many doubt the stability and value of the dollar. It does mention that Pimco and Berkshire Hathaway Chairman Warren Buffet have come out as high-profile critics of the ballooning debt and how it could lead to negative outcomes for the U.S. dollar. I'm mostly interested in this article because it caps a week where we've seen a ton of articles from the financial media on the value of the dollar, but none with any real news or any "meat" to them. I find that rather curious but I can't explain it.

Senator Warns of Inflaton
Senator Chuck Grassley (R-Iowa) is warning about the possibility of 1980s style inflation, which hit 13.5%. I think its quite possible (maybe even likely) that his prediction will come true. In fact, he might low-balling it a bit at 13.5%. However, I think his public statements are a bad thing, a very bad thing. Grassley doesn't really offer anything new in his analysis and theres nothing in his background that makes him particularly competent to make such a prediction. What we're seeing is the further politicization of fiscal policy and the threat of inflation. When things get politicized, they get emotional and they get polarized and it makes it that much harder to get some actual, positive change for the better since everything becomes part of a political battle between personalities.

Well, thats all for now. Stay tuned for more ...

Nouriel Roubini and the Future of the Stock Market

Most readers are probably familiar with Nouriel Roubini. Roubini was one of the few academic/establishment economists who predicted the credit crisis and the ongoing recession. Liberals especially embraced Roubini because he advocated for strong Keynesian measures to prevent the economy from going into freefall. He's emerged as one of the most influential economists in the world right now, right along with Paul Krugman. One fact that some of you might not know is that, under the Clinton presidency, Roubini was a senior adviser to Timothy Geithner(who is now Treasury Secretary under President Obama).

Roubini has warned his readers that the ongoing stock market rally has a strong possibility of fizzling out and ultimately being nothing more than a "dead cat bounce." Quite simply, the optimism in the market doesn't jive with the weak expectations for earnings growth. Today, Bloomberg has published an article presenting the viewpoint of some Roubini-skeptics. Apparently, a lot of investors genuinely believe we've entered a bull market and they cast doubt upon Roubini's warnings. In fact, according to Bloomberg, some investors might have missed out on "the biggest rally since the 1930s" because they followed Roubini's advice.

When it comes to the stock market's ongong rally, I agree with Roubini. There's a lot of exuberance around the stock market but it's definitely not based on the 2009 and 2010 projections for the U.S. economy, which are still mostly "doom and gloom." Despite all the talk about recovery and "green shoots," our political and financial leaders still haven't pointed to one industry or one economic sector that they expect to significantly grow and be able to drive a recovery over the next few years.

However, the part of the Bloomberg article that I found the most interesting was the following:

Roubini has “done a very good job on the economy,” Birinyi said in an interview Aug. 24. “Our approach is to try to understand the market and not try to do much more than that.”

Laszlo Birinyi is an investment manager (unlike Roubini, who is an analyst and a scholar at New York University) who also correctly predicted the economic collapse, in 2007 (Roubini warned his audience about troubles in the housing market as early as 2005). The article further states:

“Both of them just have a pretty deep understanding of the history of economic and business cycles,” said Eric Teal, who oversees $5 billion as chief investment officer at First Citizens Bank in Raleigh, North Carolina. “Roubini has just had more of an academic background, whereas Birinyi has been much more in the spotlight managing money and working in capital markets.”

I thought these excerpts were quite telling about so much.

What comes through is that investors perceive a divide between "the economy" and "the markets." To some degree, this explains why so many investors were blindsided by the recession. Investors were so focused on understanding the movements and dynamics of the market that they were unable to see the flawed and unsustainable foundations of the economy on which that market was based. Apparently some things dont change.

At the same time, these investors aren't completely wrong in the way they see things. What happens when a company experiencing distress lays off a significant percentage of its workforce? On the one hand, the American economy as a whole suffers because it adds to unemployment and lowers consumption. On the other hand, the economic situaton of that company might genuinely be better because it has reduced costs and has probably come closer to returning to profitability. When this happens on a mass scale, as is happening now, a kind of decoupling between the economy and the markets happens. The market comes to only represent a certain slice of the American economy. Much of the real economy is no longer reflected by the status of the market. The problem is that the media still tries to present the stock market as if it were an accurate measurement of the health of the real economy, which it isn't.

Finally, these comments show just how desperate investors are right now. A small rise in the Dow Jones Industrial Average would have been understandable considering the national economy did just avoid total meltdown. But a small rise isn't the case. The reality is that we're in the midst of one of the steepest rallies since the 1930s, as Bloomberg points out. There are very few safe havens for investors out there. So, when investors saw that the stock market was rallying they were willing to ignore the obvious signs of risk out there (including overt warnings from Roubini and others like him) and they jumped in with the hope of making at least some returns. The desperation of investors tells us more about the state of the economy than the various indices do, in my opinion. We can also see that, as long as there serious doubts about the economy, we can expect some serious volatility in the markets. As a recent commentary by me points out, the Great Depression bore witness to some of the biggest rallies in history.

So when we see something incredibly contradictory like what we see today: Roubini(who is probably the most influential economist in the United States) voicing major concerns over the future of the economy while the stock market rallies and institutional investors declare a bull market ... I think the only thing we can be sure about is that the recession is still far from over and some severely bumpy road (to say the least) still lies ahead.

Rhode Island To Close State Govt. For 12 Days

In a previous post, I mentioned that state and municipal governments were facing large deficits across the United States. In order to balance these budgets, many states and municipalities are going to either lay people off, cut hours, cut pay or employ furloughs to cut costs.

Today, the Associated Press reports on an extreme example of this phenomenon.

PROVIDENCE, R.I. – Rhode Island will shut down its state government for 12 days and trim millions of dollars in funding for local governments under a plan Gov. Don Carcieri proposed Monday to balance a budget hammered by surging unemployment and plummeting tax revenue.

The shutdown would force 81 percent of the roughly 13,550-member state work force, excluding its college system, to stay home a dozen days without pay before the start of the new fiscal year in July.

The closures come as the worst recession in decades has eliminated hundreds of millions of dollars in tax collections and pushed unemployment to 12.7 percent, the second-highest jobless rate in the nation behind Michigan.

This past decade, the government sector has been one of the few economic sectors to exhibit strong growth. This phenomenon will severely cut into that. This will further reduce consumption since these workers are being forced to take time off without pay. In other instances, states will surely lay people off and add to the unemployment rolls.

Next year we could see an even greater reduction in tax revenues and more budget cuts. If Rhode Island is shutting down state government for 12 days this year, where will it be next year?

Deflation Danger

Most of the alternative financial media has focused on inflation as the primary danger for the American economy. The reasons are obvious. The Federal Reserve has released untold amounts of U.S. dollars into the economy through its "quantitative easing" program. On top of that, China and other economies are publicly expressing doubts about the dollar and indicating that they intend to lower their holdings of U.S. dollars, which would surely put inflationary pressure on the dollar.

However, over at Reuters, writer Christopher Swann argues that deflation is still a major danger to the U.S. economy.

First, the argument that deflation is benign:

A swelling dollar can clearly be good news for shoppers as well as for those who are sitting on cash. Deflation is often a result of economic progress — productivity improvements that increase spending power. This was the friendly species of deflation caused by surging Chinese output from the 1990s onwards.

Is this the case now? No.

The current variety of deflationary pressure is far less benign. It stems not from efficiency savings but rather from weak demand. Worse still, it is accompanied by record levels of debt.

Despite frantic efforts to pay off loans, household debt is still around 130 percent of disposable income. This was precisely the combination that Irving Fisher warned about in his celebrated 1933 article on debt deflation.

Under these conditions, the rising real value of debts encourages households and businesses to sell their assets to pay down loans. As fire sales reduce asset prices — stocks and property — real net worth declines further. Output and employment decline, accelerating the slide in prices.

To add to the pain, real interest rates increase whether central bankers like it or not, discouraging borrowing and promoting even more savings.

“The more debtors pay, the more they owe,” Fisher wrote, since “the liquidation of debts cannot keep up with the fall of prices which it causes.”

Swann's argument is compelling. Consumer demand is extremely low in historical terms and appears set to go even lower. However, we can't deny the monumental inflationary pressures that also exist. Swann has hit upon an important point, however: debt is still the primary obstacle to any significant economy recovery.

But with the U.S. economy clawing its way out of recession, surely the danger has passed? Not quite. Prices are the ultimate economic straggler.

In Japan, for example, the country only started to experience falling prices roughly three years after the start of the recession in 1991. Wages didn’t start to fall until 1997. The United States could still follow Japan’s lead.

Proponents of recovery should keep this in mind. The current U.S. recession already mirrors the Japanese "lost decade" in a variety of important ways. What Japan experienced was extremely protracted. We're only one or two years into this recession, depending on perspective. Claiming we're in recovery already is extremely premature, in my opinion, and this historical example supports that perspective.

Downward pressures on prices in the United States continue to intensify, according to the latest research by Capital Economics. Core inflation may have held at a respectable 1.5 percent, but this is deceptive. U.S. goods inflation has defied gravity in part because of hefty increases in tobacco taxes over the past six months. A 28 percent increase in tobacco prices from a year ago is adding one percent to core goods inflation, according to Paul Ashworth of Capital Economics.

“Without this, core inflation would already be matching the lows reached at the end of 2003,” he says. The tobacco effect will soon fade.

Services inflation, meanwhile, has been very weak. Here the key factor has been weak rental prices, which account for about 40 percent of the total core index. Unemployment and foreclosure will continue to put relentless downward pressure on rents. Already the rental vacancy rate is at a record 10.6 percent.

Interesting. I had no idea about tobacco prices keeping up core inflation. When it comes to the rental market, supply is keeping the vacancy rate up and prices down. Homes that individuals and banks are unable to sell are being transformed into rentals until the housing market turns around. Seeing as how there are untold numbers of foreclosed homes that are purposefully being kept off the market by banks at the moment, I foresee continued downward pressure on rental prices for the time being.

Related post: Deflation or Inflation?

Result of First Poll

For my first poll on this blog, I asked the question "When do you think the current recession will end?"

The results were:

2010: 2 votes (33%)
2011: 0 votes (0%)
2012: 0 votes (0%)
2013: 0 votes (0%)
After 2013: 4 votes (66%)

As you can see, very few readers voted in the poll. Oh well. Not surprisingly though, 66% of those that did took a very bear-ish position and predict an extremely protracted recession (well, at that point it would be a Depression) lasting beyond 2013. A little bit more surprisingly, 33% of voters were quite optimistic that the recession would end next year. No one took any middle ground. Quite interesting and only time will tell at this point.

I'll try and have a new poll up soon ...

Where are the jobs?!

Today, I'm looking at the Bureau of Labor Statistics unemployment numbers for July. As many have pointed out before, the federal government's numbers don't represent the real number of unemployed people out there. For an understanding of why that is so, you should turn to the Shadow Government Statistics web page on employment. Regardless, here are the government's numbers:

Unemployment Rates for States Monthly Rankings Seasonally Adjusted July 2009p
Rank	State	Rate
1	NORTH DAKOTA	4.2
2	NEBRASKA	4.9
2	SOUTH DAKOTA	4.9
4	UTAH	6.0
5	IOWA	6.5
5	OKLAHOMA	6.5
5	WYOMING	6.5
8	MONTANA	6.7
9	NEW HAMPSHIRE	6.8
9	VERMONT	6.8
11	VIRGINIA	6.9
12	HAWAII	7.0
12	NEW MEXICO	7.0
14	MARYLAND	7.3
15	ARKANSAS	7.4
15	KANSAS	7.4
15	LOUISIANA	7.4
18	COLORADO	7.8
18	CONNECTICUT	7.8
20	TEXAS	7.9
21	MINNESOTA	8.1
22	DELAWARE	8.2
23	ALASKA	8.3
24	MAINE	8.4
25	PENNSYLVANIA	8.5
26	NEW YORK	8.6
27	IDAHO	8.8
27	MASSACHUSETTS	8.8
29	WEST VIRGINIA	9.0
29	WISCONSIN	9.0
31	WASHINGTON	9.1
32	ARIZONA	9.2
33	MISSOURI	9.3
33	NEW JERSEY	9.3
35	MISSISSIPPI	9.7
36	ALABAMA	10.2
37	GEORGIA	10.3
38	ILLINOIS	10.4
39	DISTRICT OF COLUMBIA	10.6
39	INDIANA	10.6
41	FLORIDA	10.7
41	TENNESSEE	10.7
43	KENTUCKY	11.0
43	NORTH CAROLINA	11.0
45	OHIO	11.2
46	SOUTH CAROLINA	11.8
47	CALIFORNIA	11.9
47	OREGON	11.9
49	NEVADA	12.5
50	RHODE ISLAND	12.7
51	MICHIGAN	15.0

Two observations:

1. Only three states have an unemployment rate below 5% (the Dakotas and Nebraska). If you're looking for a job and willing to relocate, I might begin looking there. I say might because, being of such small size, these states haven't really experienced much economic volatility at all during this recession. They haven't lost that many jobs but they're not job creating engines either. So I imagine just showing up and finding a job would be quite difficult.

2. The states with the lowest unemployment figures are all relatively low-population states with not that many urban centers. The states with the largest populations and most urban centers are the ones with the highest unemployment figures. The one exception is Texas, which is "only" at around 8% unemployment according to the BLS. Economists are saying we're entering a "job less recovery" ... meaning stocks and assets might make gains for investors but it doesn't appear that many jobs are going to be creating in the near future. Even the most optimistic establishment economists are saying that half of the manufacturing jobs that left this country during the recession will never return. That's a very negative job picture for the American public. There is no way the American consumer is going to return in a big way under those conditions, yet that is exactly what this economy needs according to these same economists. This is a major reason why I'm extremely skeptical about a recovery any time soon.

Indian Exports Seek New Markets

Bloomberg reports:

“About 60 percent of our traditional export markets are in recession,” Sharma told reporters in New Delhi today. India will be looking to expand its markets to “make sure that our exports remain competitive,” he said.

The worst global recession since the Great Depression has cut demand for made-in-Asia goods. Flagging exports are forcing Indian companies in sectors such as jewelry, textiles and leather to cut production, weakening an economy expected by the central bank to expand at the slowest pace since 2003.

The Trade Ministry will announce more assistance for exporters in a policy statement on Aug. 27, Sharma said. India’s exports dropped 27.7 percent in June from a year earlier to $12.8 billion, the ninth consecutive monthly decline. Exports plunged 33.3 percent in March, the biggest fall on record, according to Bloomberg data going back to April 1995.

That's a pretty disastrous drop in exports for India.

August 27th will be an important day. I would advise paying close attention to the markets; it will be interesting to see how they react. India looks ready to diversify to new export markets. Does this represent a decline in confidence in the U.S. consumer (and dollar)?

India is also relying on trade agreements with other countries in a bid to bolster exports as the global recession drags on demand.

India last week signed a trade pact with the 10-member Association of Southeast Asian Nations, a move that may result in trade between the two increasing to as much as $60 billion from $47 billion last year.

The trade deal is “positive from two strategic perspectives: to counter the influence of China in Asean markets and to improve India’s negotiating capabilities at an international level,” said Rohini Malkani, an economist at Citigroup Inc.

Are these the new markets India will pursue? Will we see increased competition between China and India? Just how much money will the Indian Trade Ministry devote to developing these new trade markets?

All questions that will be answered in due time ... This is certainly a bold move by India, or at least it seems that way from this preliminary announcement. If this pays off for India, we could see other countries follow suit and decide to diversify in terms of who they export to. Namely, it will be interesting to see whether or not China responds to this with its own initiative in Southeast Asia.

Forecast Calls For Higher Taxes

Today, the Toronto Star tells us that:

OTTAWA–The International Monetary Fund says most countries will need to raise taxes to pay off the trillions of dollars they spent fighting the global recession.

IMF chief economist Olivier Blanchard says in an article to be published today that governments acted properly in ramping up spending to stop the worst slump since World War II.

Soon, he says, nearly all countries will have to raise taxes to pay the recovery bill.

I'm not sure why the IMF has to publish an article in order to inform the public of this fact. How else were governments expected to pay for these stimulus programs?

Blanchard, meanwhile, says with the recession virtually over, what is left are deep scars that will take years to heal.

He sees positive growth for most countries in the next few years, but says it will be sluggish.

“The recovery has started,” Blanchard says in the paper released by the Washington-based lender.

“The crisis has left deep scars, which will affect both supply and demand for many years to come.”

In many countries, the potential exists for economies never to return to where they stood before the recession hit, Blanchard states.

I disagree that the recovery has started. None of these officials can point to one sector of the economy that is actually experiencing significant growth, not even the government sector under their control. Nor can they rebut the myriad facts that point towards the economy worsening, not recovering. The only bright point is the ongoing stock market rally. However, the stock market is driven more by investor psychology than by economic fundamentals. For whats it worth, the stock market in China just officially entered a bear market.

A rebalancing among nations is also needed, the IMF says, with countries like the United States increasing imports and economies like China increasing exports.

I'm assuming this is a typo or I'm just reading it wrong. Rebalancing would involve the U.S. increasing exports and China increasing imports, but the chance of that happening is close to nil right now.

Fiscal deficits could feed "worries about U.S. government bonds and the dollar ... causing large capital flows from the United States," Blanchard added.

"Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty" that could derail recovery

No joke: President Obama just raised the 10-year budget deficit projection to $9 trillion from approximately $7 trillion. It's pretty obvious that taxes are going to have to be raised to cover this increasing deficit. As for the fate of the dollar, I covered that in a previous post.

Is the Recession Over in Europe?

The recession is over in Europe. That's what much of the American and European financial media is declaring. Unlike most industrialized nations in the world, Germany and France actually experienced economic growth during the last financial quarter. That fact, combined with the announcement last week by Eurostat that the Eurozone economies only declined by 0.1% quarter-to-quarter, has many feeling that the recession is on its way out and a recovery is here for Europe.

Are they right? Writer Ulrich Rippert of the World Socialist Web Site says 'no.'

I'll begin with this interesting tidbit:

At the same time there are voices warning of undue optimism about an economic recovery. In its latest edition, the weekly Die Zeit writes: “‘Recovery at last! Investment bankers establish upward trend,’ reads the New York Times. ‘Further progress in the business world,’ reports the Wall Street Journal. ‘Economists see signs of a recovery.’ ‘Powerful rise on the stock markets,’ report others... The headlines appear to come from August 2009. In fact, they are from the year 1931. They were published in the midst of the Great Depression in the US, i.e., in the blackest economic epoch of the 20th century.

This echoes something I've said before: prolonged recessions/Depressions bring about extreme market volatility. The Great Depression bore witness to some of the biggest stock rallies in history. A growth in stock prices, especially an extremely rapid one, does not necessarily indicate that the economy is actually in recovery. It might indicate such a thing, but it is not a given, yet the media is treating it as a given. The reality is that this kind of historical precedent (the experience of the Great Depression) is pretty much impossible to factor into the statistical models that today's investors, analysts and economists employ. Their field of vision is much more narrow. And that's the problem ... understanding the historic point in economic history we're at right now requires a panoramic lens, so to speak.

Rippert continues:

In these declarations there is a combination of self-delusion and calculation. The politicians and financial players have a vested interest in promoting a mood of euphoria to sustain the heady rally on global stock markets. However, there is little in the actual economic situation in Europe and internationally to justify such optimism.

The minimal economic growth reflected in the latest data should come as no surprise, given the manner in which governments across Europe have opened up their treasuries to bail out the banks. Hundreds of billions of euros in public funds have been placed at the disposal of the major financial institutions, without any demands being placed on the banks or a single one of the bankers responsible for the crisis being held accountable.

Not only have the banks dictated their own rescue packages to their respective governments, they have profited handsomely from the process. The billions turned over to the banks are being used as a pool for further speculation, while bailed-out banks impose high interest rates and fees on governments seeking loans to cover their ballooning debts.

The financial elite regards the crisis as an opportunity to dismantle, with the collaboration of the trade unions, all that remains of the social gains won in the course of decades of struggle by the working class.

Nothing surprising here. Europe mirrors the U.S. in a lot of regards. Its interesting to see a self-declared socialist web site criticize trade unions. In the U.S., I disagree that the trade unions are serving to "dismantle" the position of the working class. First off, most blue collar workers are no longer in unions to begin with. Secondly, the trade unions were actually the primary opponents of Governor Schwarzenegger's budget in California. With that being said, I would agree that the unions aren't really playing much of a big political role or offering up anything new in terms of where the economy should go. That's a big difference from the 1930s.

What is the underlying economic reality? Compared to one year ago, the German economy has declined by no less than 7 percent. In a few months, the German “cash for clunkers” scheme will expire, accelerating the decline of the country’s auto and auto-supply industry. The consequences for the German steel, engineering and chemical industries have already been felt.

Up to now, mass redundancies in Germany have been avoided by means of a reduced work-hours scheme, which has been renewed several times. When the 1.4 million employees on short-time work eventually join the ranks of the unemployed, the official unemployment level will rise to 5 million.

...

The constitutional “brake on debt” which was recently passed by the German parliament means that the first priority of any future government will be drastic budget cuts. The promises being made by all of the parties taking part in the national election campaign will be consigned to the waste bin as soon as the votes have been counted on September 27.

...

A glimpse of what is to come was provided by the so-called “Guttenberg Paper,” which was made public just a few days ago. The document, bearing the title “Proposals for a Sustainable Industrial Policy,” was commissioned by German Economics Minister Karl-Theodor zu Guttenberg and lists some of the savage measures which business lobbies are demanding in response to the crisis. Similar measures to those outlined in the “Guttenberg Paper” are already been prepared by the appropriate ministries, but there is an agreement amongst the various political parties that no one raise such themes in the course of the election campaign.

The Frankfurter Rundschau reports that the 52-page document calls for “tax relief for businesses,” “the reduction of supplementary wage costs,” and “increased flexibility in the labour market.” The document urges a weakening of job protection provisions, limits to sick pay and the scrapping of proposals for a guaranteed minimum wage.

Interesting. In short, the German state is basically expending all of its resources to hold up the economy. Even then, the economy is barely above water. It appears that Germany is already on track to experience what California is already facing today ... massive government budget cuts and an end to the various subsidies and measures by which the state propped up the economy. Last week I commented on what awaits places like California and Ireland where the government sector and state welfare policies have been drastically reduced ... and the picture ain't pretty.

I haven't really explored the World Socialist Web Site very much, but I thought this was a pretty good article. It certainly offered one of the best rebuttals to the claim that its all smooth sailing for the European economies from here. In actuality, we can see that they still face a lot of hardship.

Benelux: Less Work, More Productive

BusinessWeek has an interesting article comparing productivity per hours worked between the United States and Europe.

Europeans on average pocket almost 10 more vacation days than their U.S. counterparts. That's the findings from research by consultants at Mercer, which analyzed the minimum number of vacation days that companies across Europe must provide to staff with 10 years' service, as well as the number of national holidays in each country.

The study reveals the average time off in European Union countries is now 34.4 days, compared with just 25 in the U.S. Overall, employees in Lithuania are entitled to the greatest amount of paid leave, with 41 holidays per year. France and Finland come a close second, with 40.

The article assures us that, overall, the U.S. is still the "most competitive country" in the world. Competitiveness seems like a completely different economic measurement seperate from productivity to me, but I suppose that's beside the point for this article. Europe does give the U.S. a "run for its money," as the article puts it, although BusinessWeek pegs some areas (Eastern Europe) as being less productive per time worked than others.

The clear winners are the Benelux countries though:

Europe's top performers include some of the region's smaller nations. Leading the way are the Benelux countries (Belgium, the Netherlands, and Luxembourg), which outperform the U.S. based on gross domestic product per hours worked each year. According to the Organization for Economic Cooperation & Development, Belgium and the Netherlands, which mandate 30 and 28 annual vacation days, respectively, are almost 2% more productive than the U.S. And Luxembourg, with its highly competitive financial services industry and 32-day yearly vacation allowance, is a staggering 27% more efficient.

Interesting stuff. I wonder why the economic media hasn't explored the Benelux economies more? After all, we hear about Scandinavia and its social democracy all the time. I suppose whether or not these countries are actually as efficient as this article makes it out to seem is debatable and whether or not the U.S. can emulate them in any way is another question altogether. I can't really give my own opinion or take on it without looking at them with more depth, which I might do someday, but for now I leave it at that. On a political note, I wonder why American liberal politicians focus so much on Scandinavia and Britain as models to emulate, especially the recent comparisons between the British National Health Service and the Democrats' proposed health care reforms? There are other countries in Europe (like the Benelux trio) that beat us in terms of economic efficiency while being more social democratic. Maybe liberals should take a harder look at the rest of Europe. What is your take on it (especially my European readers)?

Reuters on the Fate of the Dollar

A few days ago I responded to a Reuters Blogs posting by writer Agnes Crane regarding the ongoing bull market for U.S. stocks. Crane's perspective was ultimately optimistic - she argued that, while American stocks would face volatility, the rally would continue.

I definitely took notice today when I cruised over to Reuters Blogs and saw a post by the same author entitled 'Getting ready for the dollar's fall.'

I'd like to respond to that article here.

It just won’t go away, this needling worry about the U.S. dollar losing its coveted top-dog status.

No matter that there are plenty of reasonable arguments to support the dollar as the world reserve currency — namely there’s just no alternative — for perhaps decades to come.

Yet, in a world where once-rock-solid assumptions quickly turn to dust, investors should keep an eye on the dollar since changing perceptions are chipping away at its cherished status as currency to world.

Much of the debate so far this year has centered on creating an alternative to the U.S. dollar, championed by China and Russia as a way to wean the world off its dependence on the U.S. as well as buffer individual nations against the missteps of those in developed world. Most recognize creating a new currency will take years and the chances of an existing currency, like the yuan, usurping the dollar anytime soon are remote.

I would argue that Crane needs to reflect a little bit more on her own writings as she answers some of her own questions.

Why won't worries about the dollar go away? Maybe its precisely because we live in a world "where once-rock-solid assumptions quickly turn to dust." We're living in historic times, as some would say. We have already seen a variety of banks, corporations and institutions that were all dubbed "too big to fail", well, fail. Now we have the financial media essentially telling us that the dollar is "too big to fail." And the public is supposed to believe that without question?

Crane also states that there is no alternative to the dollar. A few paragraphs down though, she points out that China and Russia are already contemplating alternatives. Her new argument is that such a large-scale implementation of a new currency would take a long time, years in fact. No doubt that is true. But if Russia and China were to announce their intent to create a new supra-national currency (more on that below) and begin reducing their dollar investments, that alone would destroy much of the value of the dollar before any actual implementation began.

In fact, I would argue with the very premise of this article. The dollar doesn't have to lose its reserve-status. Foreign countries, especially China, could simply begin investing in baskets of other currencies and move away from dollar holdings. That alone would provide a pretty big blow to the American economy in this economic climate.

But that doesn’t mean big money isn’t starting to prepare for world in which the buck isn’t the currency of choice.

Curtis Mewbourne, a portfolio manager at PIMCO, has suggested that investors diversify away from the dollar and to move into other currencies, especially those in emerging markets.

“And while we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” he wrote in an article published on PIMCO’s website.

Indeed, Bloomberg news has an article on PIMCO's report. Ms. Crane argues that implementation of a new supra-national currency would take a long time. Well, how about this: Bloomberg mentions that Russian President Dmitry Medvedev presented a sample coin for a new supra-national currency at a recent international summit. No doubt its a bit of political side-show but you're definitely not hearing news like that on the economic report of your eleven o'clock newscast.

The financial crisis, however, woke the world up to just how vulnerable those squirreling away dollars — like China and Russia — were to the fortunes of the United States. The bulk of the world’s currency reserves are in dollars, with the euro still a distant second. Foreign central banks, however, could hardly start selling dollar-denominated assets to limit their exposure because such sales would cause prices on their remaining holdings to fall further.

Here, Crane finally makes a good point in favor of her argument, one she should have made at the beginning. This is the critical dillema facing countries like China right now. Its something of a Catch-22. However, if the dollar's value keeps declining China loses either way, so eventually the cost-benefit analysis might tip and make reform the best option for China anyway.

That’s because the loss of reserve status means, among other things, that the United States would lose a crucial crutch that has allowed it to borrow its way into prosperity as well as out of depression with relative impunity. Foreign investment in dollar assets have helped keep a cap on interest rates even though the government’s borrowing binge in recent years has brought new meaning to the word stimulus.

Yes, a dollar dive would be pretty disastrous for the U.S. We would likely see the standard of living of the average American decline (further). The really scary question is ... if the dollar does take a dive where does the American economy go from there? 70% of our economy is consumption and that consumption would be severely impacted by a large decline in value for the dollar. This is why you have so many ultra-bears predicting Doomsday - the effects of hyperinflation would pretty much be ruinous. Of course, some are actually predicing massive deflation as I point out in a previous post.

In an op-ed published in the New York Times today, Warren Buffett railed against the flowing red ink that will push the nation’s debt to roughly 56 percent of GDP from 41 percent in this fiscal year.

Presumably this is something that has also caught the eye of foreign investors.

While the greenback is likely to stay on top for some years, persistent concerns about its reserve status and moves to diversify away from it could usher in a new era for U.S. borrowers, public and private alike — a more painful one where debt costs can no longer be offset by the kindness of foreign investment.

Indeed.

Although I've criticized this article and Agnes Crane, I actually find it quite refreshing that Reuters is tackling this topic. Its quite timely and quite serious but it seems like a lot of mainstream media outlets don't want to touch the topic, either because its too complex for the average American or because the implications are too scary. Overall I would say that this was a decent blog post.

Twitter and it's Parasites

Over at Reuters Blogs, Jon Cook has an article up entitled 'Is Bit.ly's Twitter advantage unfair?'

Bit.ly and Tr.im are URL-shortening services. As some of you may know, Twitter has a 140 character limit, so these websites exist to make URLs short enough to fit into 'tweets.'

The thrust of the article is that Tr.im finds Bit.ly's special relationship with Twitter (as its default URL-shortener, ooh la la) unfair, and is likely to go out of business because it can't compete.

Here is a quote:

Tr.im further stoked the Bit.ly-Twitter relationship debate, by adding that “Bit.ly has a monopoly position that cannot be challenged with reasonable investment or innovation unless Twitter offers choice. This is a basic reality of challenging monopolies. Bit.ly has deep personal connections and agreements with Twitter that we simply cannot compete with. And it is our humble opinion that this type of favoritism will become an issue for all Twitter developers.”

First of all, as many of the commenters on the Reuters Blog post pointed out, in most other industries this is simply called free competition. Enterprises are free to form preferential relationships with each other ... what exactly makes Tr.im think it deserves some special privelege ... and what makes Reuters' writer Jon Cook think this story is newsworthy?

Secondly, I find this whole issue to be representative of all that is troubling about the "new economy" led by the "creative classes."

I personally find Twitter to be incredibly overhyped. It doesn't really offer anything that existing web services didn't already offer. In fact, it artificially constrains messages to 140 characters for who knows what reason. I suppose it represents the incredibly short attention spans of today's media-crazed populace. Twitter's growth has been mostly driven by hype and social influence ... people try it out because all of the cool people are doing it, not because its actually useful. If you scan through Twitter you'll find that most "tweets" are often just plain junk, that or what are essentially private test messages put out in the open.

Here, however, we're not even talking about Twitter. We're talking about companies that act as parasites on Twitter. Both Tr.im and Bit.ly basically existed to serve the "market" for URL-shortening that Twitter created. The fact that one of these companies is complaining about a "monopoly" would be hilarious if it weren't so pathetic. Do these companies really think theres a viable market allowing for multiple competitors in URL-shortening for Twitter? Isn't Twitter going to eventually buy and incorporate one of these companies anyway? Truly, this is a tragedy of the greatest proportions, LOL.

And yet ... this is what our leaders tell us is the future of the American economy, or at least should be. This kind of "social entrepeneurship" ... this kind of "innovation" (and truly, where would society be without the marvelous innovation of Twitter and Bit.ly?). Even though there are billions of people around the world who need to be fed, clothed, given housing, given transportation, etc. any kind of industrial or physical economy is "dead" in the eyes of many of America's political and economic leaders. Instead, the future many of our leaders would prefer is one where we design new ways to waste time (and to make that time-wasting process more efficient). I seriously wonder whether the people investing millions of dollars of capital into these pointless tech companies and the political leaders heralding them as the greatest thing since sliced bread have ever actually visited and spent time on these sites.

Well, enough ranting for me ... If you agree with me, spread the word about my blog. If you don't, express your differences in the comments.

Addendum: Spoke Too Soon on China/Australia

In my previous post, I pointed out the dependence of the Australian economy on exports to China. There, I said that as long as the Chinese government's stimulus program didn't change Australia would likely fare fairly well during the rest of this recession.

It seems as if I spoke far too soon.

I was just surfing through Reuters when I stumbled upon this news article:

BEIJING (Reuters) - The Chinese government is attempting to pass the baton of growth from state-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.

Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.

The rest of the article is about the Chinese government's fears about the housing market heating up too fast. No further comment is offered on how state-funded infrastructure investment is being reduced, if in fact it is. I don't know the intricacies of the Chinese economy enough to be able to comment on how this will effect Chinese raw materials imports from Australia. Nonetheless, this seems to complicate the situation and what I stated in my previous post.

Australian Economic Forecast

The Australian economy doesn't get much attention in the American press. Today, however, I found an interesting article from Forbes on the future of the Australian economy.

The good news is that the Australian economy is nowhere near as over-leveraged as the American and British economies are.

Australian activity has remained surprisingly strong during the global crisis. Monetary and fiscal policy were aggressively switched to stimulus at an early stage. Australian banks were never exposed to the same degree of risky lending as their counterparts in the United States and the United Kingdom. The strong fiscal position enjoyed by the government enabled it to extend guarantees to various parts of the financial system at relatively low cost.

The bad news?

Over the past two years China's share of Australia's merchandise exports has risen from 15-20%.

and

The sharp fall in Chinese exports has not resulted in lower demand for Australian resources, as China's fiscal stimulus has focused on infrastructure, for which Australia is a supplier of raw materials. Although export prices are down from 2008 peaks, total Australian merchandise export volumes have risen in the nine months to June.

So Australia is heavily dependent on the Chinese market for raw goods. Lately, the media has been printing all kinds of troubling news concerning the Chinese economy ... everything from the macro effects of slumping American consumption to the decline in the real estate markets of Shanghai and Beijing. However, China is importing raw goods that are to be used in infrastructure construction. As long as the Chinese government keeps up its fiscal stimulus program and keeps it oriented towards infrastructure construction, the Australian economy should be, more or less, fine.

So, for now, I think the Australian economy will face some pain, but, not quite on the level that the U.S. and U.K. are facing. Of course, if the entire global financial system melts down, this all goes out the window. That's a big "if" of course.

Quick Update: Swine Flu in Japan

A few days ago I made a post about the effects of the swine flu on the Indian economy.

Today, the Japanese Health Minister has declared that the swine flu has reached pandemic levels in Japan after a third death in the nation from the virus.

At the moment, it doesn't appear as if the virus is having the same major effects on the economy that it had in Mumbai and other parts of India. That doesn't mean that it won't in the near future, however. The Health Ministry might be accurate and the virus could spread at pandemic levels. Or, the Health Ministry might be blowing smoke and being extra cautious. Even then, the media attention has the capability of transforming this into something larger and keeping people away from public places (and thereby from consumption).

In one of my previous posts, I commented on how stock markets are often driven more by psychology than by economic fundamentals. If history serves as a guide, then I would not be surprised in the least if this news affects Japanese investors and drives prices down, if only temporarily. Recently, negative economic news out of China and Japan hurt stock prices in the United States and Europe. That presents a pretty negative prospect, but that's reality in this global economy.

Keep in mind, I'm not predicting a decline in stock prices. Like I said in a previous post, I don't focus on the stock market, I prefer to try and gauge how the so-called "real economy" is doing. I'm merely pointing out that this swine flu is something to keep an eye on, since it definitely has the prospect of affecting economies.

Deflation or Inflation?

Nathan A. Martin writes the Economic Edge blog. Martin is the author of the 'Flight to Financial Freedom' book and is certainly a guy who knows what hes talking about when it comes to finance and the economy.

I bring his blog up for a reason. During this recession, the alternative and independent media has focused in on the idea that the outcome of this recession will be inflation, if not out-and-out hyperinflation like the Weimar Republic of Germany faced earlier this century. Much of this sentiment originates from the so-called Austrian School of economics. Dr. Ron Paul is one notable politician who has warned about the hazards of hyperinflation (and who I respect quite strongly).

Mr. Martin is also quite pessimistic about the future of the American, and world, economy, judging by his blog posts. However, he argues that, rather than inflation, the U.S. is about to enter a deflationary cycle. I don't really feel capable of answering this question, of predicting whether we'll face inflation or deflation, but I found his argument to be enlightening and educational nonetheless and really quite compelling. So I strongly urge you to visit his website and read his post, which you can find *here*.

Here is an excerpt from his post:

No, I’m not being over-dramatic. It is time to buckle the heck up. The resonant disconnect between reality and the pumping that is going on in the media and among supposed “experts” is at an all time historic, never been here before, Economic Mass Psychosis, HIGH.

To Quote John Kenneth Galbraith, “The majority is always wrong.” Right now the majority believe we are exiting the crisis. They are just plain old fashioned WRONG – again.

To prove my point, I’m going to show you the week in charts courtesy of the St. Louis Fed. This week, however, I’m issuing a WARNING. The evidence in these charts points to the beginning of a DEFLATIONARY SPIRAL. The PPI data comes out next week and will be a key piece of evidence in this regard. The results of a deflationary spiral will be UGLY if entered. You will see another round of deleveraging to go with locked credit markets. Equities will get hammered and the real cleansing of the economy will accelerate. This process will be PAINFUL but necessary to end the malinvestment. It will be the phase where more businesses who were hanging on HOPING for recovery will simply run out of cashflow to maintain operations. The same thing is necessary to cleanse a way over-bloated government and military.

The fallout will affect everyone. These charts are HISTORIC, they are NOT indicative of a short recession. As you view these charts, pay attention to the negative trends and look at them from a historic perspective. Many market callers are looking for immediate inflation due to the money pumping. I challenge them to point out inflation anywhere in these charts besides the money aggregates, which, by the way, are not growing at the rate they were. Those who look solely at the money aggregates are not seeing the destruction of credit which is very real and has hobbled the consumer. Never ending growth was a fantasy and is over for the time being, there is simply too much debt/credit in the system.

*Please* go over and read the rest of his post right now for the rest.

Response to Agnes Crane on Reuters

Writer Agnes Crane has written an article for Reuters Blogs entitled 'Don't be fooled by global stock stumble.' Her basic argument? Don't lose confidence in U.S. stocks because of today's (8/17/09) stock market drop.

I want to emphasize that I am definitely not a stock market "guru." I personally feel that the stock market doesn't accurately represent the real American economy. To begin with, the stock market does not encompass the entire American economy - small-businesses often drive American economic growth and expansion much more than publicly-owned corporations. Secondly, the stock-market is driven much more by psychology than by economic fundamentals. The various bubbles that have popped or are in the process of popping during this recession were created because individuals ignored the fundamentals of the economy and latched onto blindly optimistic sentiment that grossly overvalued just about everything in our economy. Psychology changes on a whim, but the fundamentals stay basic.

Still, I do follow news concerning the stock market because it does have some relationship with the real economy. I just try and keep a critical mind that attempts to discern between reality and falsehood. With that in mind, I want to respond to Crane's commentary here.

She writes:

Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Once again, the argument is entirely psychological. According to her, all that is wrong is that investors are psychologically uneasy because of the significance of August (and presumably, her commentary will serve to destroy this notion and keep you psychologically optimistic and ready to invest in stocks). Is this argument true? Personally, I find it laughable. Lets try to imagine this scenario for a moment ... an investor is watching his money grows as the stock market rallies, suddenly he looks at his calendar and sees its August ... uh-oh, bad things have happened the past two Augusts ... I guess its time to pull all of his money out! Sound realistic? Last week Reuters reported that major "insider" investors were pulling out of stocks. Do we really imagine that big-time investors with lots of experience and lots of money invested in the market are going to pull-out based on what month it is?!

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Hmm ... wait, I thought it was all just skittishness on the part of investors? So, Crane admits here that the economy has serious problems that cast major doubt on the viability of the current rally. Should you be worried, like a lot of those "insider" investors are?

Monday was an ugly day, but investors should try to rein in their anxiety about what it means for such big-picture questions as what shape the economic recovery will take. That’s because a battle between bulls and bears, which typically emerges at economic turning points, has taken hold of financial markets — meaning today’s worries about the global economy are likely to morph into tomorrow’s worries about too much stimulus creating dangerous asset bubbles.

It’s a constant tension and one that will continue to push and pull financial markets for some time to come.

Her answer is no. What shes basically saying is that we're in a time of great volatility. Keep in mind that the Great Depression was a period of great volatility as well. The Great Depression saw some impressive stock rallies, which all turned out to be illusory by the way. The author has no way of ascertaining that this is a "turning point" except through hindsight, so it is merely supposition, or wishful thinking, on her part.

“The markets have very selectively reacted to economic data,” says Stephen Stanley, chief economist at RBS. Little more than a week ago, for example, the S&P 500 hit a 10-month high after the U.S. reported “only” 247,000 workers were dropped from payrolls in July.

When do the markets not selectively react to data? The entire housing bubble was caused by "selective reaction." Furthermore, the July unemployment numbers have been challenged for being artificially-low by various sources. I won't go into it now, but if you want to know more about how the U.S. calculates unemployment from payroll sources, I point you to ShadowStats.com's page on the matter.

Given the big run up in risky assets like stocks and corporate debt since March, and last week’s data, it’s not surprising that investors are now worried that the rosier outlooks failed to take into account the growing fixation of the U.S. consumer on savings.

Take price-earnings ratios. Bespoke Investment Group noted last week that the P/E ratio of companies in the S&P 500 climbed to its highest peak since 2004, as earnings failed to keep pace with the optimism that fueled a 50 percent jump in the S&P 500 stock index since March. For earnings to catch up, the consumer will have to shake off worries about high unemployment rates and pitch in with good old-fashioned shopping. So far, that’s looking like a stretch.

So, chalk up the stock declines to correcting what had become overbought conditions and get ready for more choppiness ahead.

This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.

I don't have much to add here. The author asks the reader to not be worried and assures us that this is merely a "turning point" towards better times ... yet provides us with nothing but troubling economics forecasts. Where is the positive news to convince the reader to stay invested? It is definitely not present in this article. The author seems to think that by merely explaining the reasons why investors have lost confidence in the market rally that somehow negates those reasons.

Overall, I found this to be a very poorly argued commentary piece and I'm quite disappointed in Reuters. Financial journalism isn't very good these days. More often than not, you're better off reading independent and alternative news sources for actual truth.

Is the Stock Market Rally Over?

Here are a few reports from Reuters on the current state of the stock market. Here, Reuters reports that:

NEW YORK (Reuters) - Stocks suffered their worst loss in seven weeks on Monday as weak data from Japan and a disappointing outlook from retailer Lowe's Cos (LOW.N) dampened hopes about the economy's growth.

Japan's gross domestic product showed its economy pulled out of recession in the second quarter, but at a slower pace than expected, prompting a sell-off in major Asian markets that spilled over into Europe and North America.

....

The results amplified worries about weak consumer spending following last week's poor data on U.S. consumer sentiment and retail sales.

The health care sector managed to outperform most other economic sectors. Is the stock market rally of the past few months over? Will we see the Dow Jones Industrial Average go below 9,000 points again? Only time will tell. Its pretty clear that the primary reason for the decline is the fact that consumption seems to be on a consistent decline and shows no sign of recovering. The retail sector is struggling especially hard.

Here is another story from Reuters, published last week, that is of interest to anyone invested in the stock market:

NEW YORK (Reuters) - A massive rally in U.S. stocks since March has reawakened bullish spirits, but insiders are jumping out of the market in a sign the run up is getting stretched.

Company executives are selling stock at a rate not seen in two years after a near 50 percent rise in the S&P 500 from a March 9 low. That suggests directors and managers may think stock prices are nearing the top end of their range in the current economic climate.

...

For brokerage Jefferies & Co., a significant increase in insider selling transactions as well as a decrease in short interest across most sectors of the S&P 500 demonstrates the weathering of the bear market rally.

...

Since early March investors have piled back into the stock market in the hope of an economic recovery, bank sector stabilization and expectations many more will follow them.

...

"Insiders historically have a strong correlation on a macro level to buying and selling, said Silverman, who is based in Princeton, New Jersey. "There's a lot of negative signs right now coming from insiders."

It seems like investors should definitely consider the implications of these news stories. While the media and some financial institutions publicly declare that the recession is on its way out and a recovery is here, some major insiders are dumping stock. Who is going to be left holding the bag if the stock market takes a dive again?

Here is one final report, also from Reuters:

Of late there has been an influx of money, but it's not necessarily good news. Recent experience shows that the biggest influx of money comes at the peak, according to Birinyi Associates.

"It's somewhat of a reverse indicator," said Jeff Rubin, market strategist at Birinyi in Westport, Connecticut. "You do want money going in, but you don't want this tremendous shift."

While it hasn't been a tidal wave, money is returning to stocks, according to data from the Investment Company Institute. For the week ended August 5, equity funds saw an estimated inflow of $5.5 billion, compared with an inflow of $3.4 billion the previous week.

In the short term, such flows can bolster heady gains, but larger bouts of optimism are often a sign markets are about to turn.

So there you have it. Quite a negative picture from Reuters on the future of the stock market, at least in the short-term. It seems as if we may have reached another turning point in this prolonged recession the world is experiencing.

Government Sector in Big Trouble

Over the past few years, three of the economic sectors with the most growth were health care, education and government. Of course, health care and education are often intimately tied in with the government. A lot of people strongly believed that these sectors were "recession-proof" and safe places to develop a career. It appears they might be wrong. Very wrong.

A few days ago the Washington Post published this story:

As states across the country grapple with the worst economy in decades, most have cut services, forced workers to take unpaid days off, shut offices several days a month and scrambled to find new sources of revenue.

The good news is that much of the pain this year has been cushioned by billions of dollars of federal stimulus money, which has allowed states and localities to avoid laying off teachers, prison guards, police officers and firefighters.

The bad news is that for the next fiscal year, beginning in July, the picture looks even bleaker. Revenue is expected to remain depressed, even if the national economy improves. There will be only half as much federal stimulus aid available, and many states have already used up their emergency reserves.

The bold emphasis was added by me. California is the prototypical example of this. The budget recently passed is slated to cut a lot of state jobs. As the recession deepens in 2010, we can probably expect further cuts. That means higher unemployment. The cuts to government services will also surely have a negative effect on consumption.

In California, a great number of teachers have been laid off by the new budget. That means both the "government" and "education" sectors, which were supposedly "recession proof," are going to take a massive hit in 2010. As this article indicates, this isn't just a California problem, we're going to see this kind of thing across the U.S.

Here's a report out of Europe, from Ambrose Evans-Pritchard. I'm not usually a big fan of Mr. Evans-Pritchard but I definitely stand up and take notice when he titles one of his articles 'Fiscal ruin of the Western world beckons.' Quite alarming.

Concerning Ireland:

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.

He continues:

But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

He warns:

While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.

Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

No-brainer here. We should already be suspect of spending as a strategy towards solving a debt-crisis, but pointless spending that does nothing to create a more productive future is obviously futile and probably makes the problem worse.

Go over there and check out his article. It will surely make you think, even if you don't agree with his prescriptions.

Ultimately, this is setting up to be a major blow to the American and European economies, especially in 2010. The mainstream media isn't talking about this very much though, choosing to focus on hyping up a supposed "jobless recovery" and encouraging spending, although it doesn't appear to be working very well.

Quick Link: Suburb Developers Take A Hit

Over at the Financial Armageddon blog, the author has put up an interesting post about the fate of suburb developers during this recession. The results shouldn't be surprising for anyone who has followed this recession, but it makes for an entertaining read nonetheless. One quick quote from the end of the article he references in the blog post:

Hedlund says his forecasts for 2010 include the possibility that the year could be worse than 2009.

"In the meantime, communities may have trouble maintaining the infrastructure on unused land," he added. "Eventually, many lots will have to be bulldozed."

By the way, I don't agree with everything the author of Financial Armageddon writes, far from it. A lot of what he writes concerning the finer points of finance is also over my head. Nonetheless, you'll usually find something interesting over there.

Solution to recession: more wars?

Today I stumbled upon this post on a blog called Washington's Blog. I can't say I was familiar with the blog before stumbling upon this post. Taking a quick look around, I can already see that I don't 100% agree with all of the author's opinions. Nonetheless, this is a pretty provocative post.

His post tackles a simple question: will the United States government launch more wars around the world in a last-ditch bid to salvage the American economy? He points to statements made by economist Marc Faber, trends forecaster Gerald Celente (who predicted the current recession) and Justin Raimondo in order to try and answer the question.

Of course, such a move would not be without precedent. Various schools of economics will argue that the Great Depression was overcome not by President Franklin Roosevelt's Keynesian spending but rather by the nation's mobilization for World War II. Of course, political pundits have been making comparisons between current President Barack Obama and FDR for quite some time now.

While I'm willing to consider the arguments presented in this blog post, several questions go unanswered in my mind.

How exactly would any war(s) be funded? Our country is arguably in a much worse off position now than it was at the beginning of World War II. Funding a large-scale war seems practically impossible at this point, unless we're arguing that the entire global financial system will be scrapped.

Would a war actually be able to lift the United States out of its recession (or depression, as it may be)? The United States can't create something like World War II (involving the overall majority of the world's population) out of thin air. It can, however, invade a large nation like Pakistan (the 6th most populous country in the world) on its own. What would be the actual economic impact of such a war on the United States? Keep in mind, the defense industry is not what it used to be, it is no longer a mass-employment engine. It seems like such a war might only increase our national debt load without actually reviving the economy. I suppose if our leaders and the national elites are that rapacious, it doesn't really matter.

Finally, one of the posters comments that such a war is unlikely before 2012 because of the pressing need of re-electing President Obama on the part of the Democratic Party. That seems to be true. However, if the economy is completely wrecked by 2011, might not such a war (and the massive boost of patriotism it would inject into the national consciousness) be the perfect remedy for an ailing campaign? Its impossible to tell from our current vantage point and I sincerely hope none of us ever have to find out.

I ask these questions not to knock the blog post and the ideas it presents, but rather because I take such a provocative proposition quite seriously and, considering how bleak our economy currently looks, think we all should.