The Economy is Just Fine . . .
Nothing to see here, move along, everything’s fine.
That’s what Gene Epstein, Barron’s Economic Beat columnist, and author of the book Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers, is saying in this week’s magazine.
I was unsure as to where to begin in taking apart his column — its not that it is so densely packed with errors (that’s a given). Its that the author’s worldview is, well, from a different world than ours.
"THESE ARE HARDLY THE BEST OF TIMES FOR THE U.S. ECONOMY. But they may not be as bad as you think. The credit crisis, stock-market crash and fall in home prices have raised legitimate fears of a nasty and protracted recession. Yet the economy has often proved more resilient than is commonly thought — and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it’s possible that the downturn could prove to be one of the briefest and mildest on record.
The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum’s recent slide…
The cavalry hasn’t exactly swept in to rescue the economy. But the energy benefit could keep a significant recession at bay until reinforcements — particularly inventory rebuilding — arrive early next year, and as credit starts to flow more freely."
Where does one begin to fisk this? The Cavalry hasn’t swept in? You mean to say that nationalizing the finance sector of the US, guaranteeing $2 trillion dollars in lending an deposits, and cutting rates to 1.5% rates — thats not the cavalry?
And most economists understand why Oil is down — its called demand destruction. People stopped consuming it, because they cannot afford to. A global recession is deflating all manner of commodities. This is a bad thing, not a good thing.
This is economic cheerleading way, way beyond the ordinary mindless spinning. Its an entirely different order of magnitude. This guy makes my boy Kudlow look like a depressive.
He believes BLS data may be understating how great things are. In 1996, Epstein raised the question as to whether "millions of U.S. workers may be missing from the government’s jobs data." That’s right, he thinks BLS actually understates employment. I have never seen any questions about understating inflation, the impact on GDP, or any looking askance at Birth Death adjustment. Its no surprise his over-optimistic economic viewpoint has missed all manner of actual issues that matter to investors.
I don’t care about any single wrong view or forecast — its the methodology and body of work that matters. Rather than dissect Epstein’s column line-by-line, it might be more productive
to cherry pick a few of his prior columns. These are quite revealing:
Hard, Soft Or No Landing (NOVEMBER 6, 2006) The author wrote: "The stock market’s rosy view may be vindicated." Only not so much.
GDP Prospects Flash Green (MARCH 5, 2007) The author forecast: "The economy should grow nicely this year and next."
Why Recession Is Remote (OCTOBER 8, 2007) This was precisely at the peak of the last expansion — we now know Real Wholesale-Retail trade sales peaked in September 2007, and Real Income hit its cyclical high in October ’07. (Employment was December 07, and Industrial Production was January 08).
Housing Isn’t Clobbering GDP (OCTOBER 22, 2007) It wasn’t ? Then why was Q4 GDP = -0.2%?
Look for Joblessness to Hit 5.2% in Late ’08 (DECEMBER 10, 2007) Wildly too optimistic — the Unemployment Rate rate was 6.1% in September 2008, and is likely to rise.
Outside of Housing, Things Are Humming (NOVEMBER 5, 2007) The credit crisis was already 4 months old when this insightful column came out. Aside from GDP being negative, relying on a dirt cheap dollar raises the question of what happens when that dollar rises — like it has this past quarter.
Slowdown, Not Recession
(FEBRUARY 4, 2008) The irony is that NBER is likely to mark the
recession starting no later than February, based on their peak-to-trough definition.Even Money on Recession (MARCH 10, 2008) That’s a small change from the column the month before.
The Great American Savings Myth (MAY 28, 2007) Facts have proven this to be clueless nonsense. "Household net worth — assets minus debt — has never been higher." As we warned at the time, asset prices can go down, while debt doesn’t — exactly what happened.
Why GDP Will Keep Growing (SEPTEMBER 29, 2008) Thanks to high Imported Oil prices, GDP looks better than it is (high imported Oil makes the deflator artificially raise GDP.
Bottom line: If you make investment decisions based on Barron’s Economic Beat columns, you’ve lost a lot of money.
>
Source:
Sorry, Chicken Little
GENE EPSTEIN
Barron’s October 20, 2008
http://online.barrons.com/article/SB122428335256346205.html
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October 19th, 2008 at 8:51 am
Gave up reading Barron’s many years ago as I found it, for the most part, filled with nonsense. My partner had a subscription and I would read it when I sat upon the throne. To me that was the appropriate place to read it, along with the WSJ.
October 19th, 2008 at 9:18 am
Don’t think it’s going to matter much that we’ve dropped, say, 1m bpd of consumption when Mexican production will essentially fall off the face of the earth in about 4 years.
October 19th, 2008 at 9:28 am
I think that many people are still in the denial phase. It will be interesting to see what happens when they start panicking. One of the problems the economy will encounter is that a weak US recovery is likely to get crushed by rising oil prices due to a combination of a falling $ and supply issues that will intervene in the next year or two. The $ rally can’t continue much longer, I would say $60 oil might be the low as we head into the winter.
October 19th, 2008 at 9:34 am
The problem with Epstein is that he is always trying to explain why the numbers mean something different than they appear to. Occasionally, he is right, but the rest of the time he looks like an idiot.
I think that explaining possible problems with data can be valuable, but they way he actually does it results in him asserting ridiculous things.
October 19th, 2008 at 9:52 am
I work with “smart” people, with advanced degrees not in economics.
It is surprising to hear from “smart” folk that 3 dollar gas will save us and that we have now entered the promise land.
NEver mind trillions upon trillions in lossess in both the stock and housing markets as well as the fact that we now have a fourth branch of government, the fed/treasury, created by legislative fiat.
Yean, no problem here, just move along.
Still in Denial
October 19th, 2008 at 9:53 am
For forecast possibilities, I’d recommend listening to the video over at Capital Gains and Games (the panel discussion at Dartmouth moderated by Samwick). Toward the end of the presentation, you get some forecast #s that may balance Epstein’s view. It is at least remotely possible that a recession could last a long time (4 quarters plus) and be more severe (more than 1% contraction) than many believe.
October 19th, 2008 at 9:56 am
That article was astonishing in its stupidity.
One point Barry left out, Epstein points to the rise in exports as a big positive. Well, the latest figures, for August, exports fell. With the dollar having risen over the last few months, we’ll now see how much of the export boom was really just a fall in the dollar, not an increase in production.
I think grumpyoldvet was using Barron’s in the right place, but maybe the wrong purpose. The only time there’s anything worthwhile in there is when they interview someone interesting.
October 19th, 2008 at 9:56 am
Excellent analysis of Epstein; you’d think he’d be embarrassed by his past prophecy failures, but evidently not.
Barron’s has always been a propaganda sheet for corporate America, now only much, much more so under new owner Rupert Murdoch, who is without doubt an über propgandist.
October 19th, 2008 at 9:58 am
it is not even funny. these individuals are downright dangerous.
October 19th, 2008 at 10:06 am
this: The Great American Savings Myth (MAY 28, 2007) Facts have proven this to be clueless nonsense. “Household net worth — assets minus debt — has never been higher.” As we warned at the time, asset prices can go down, while debt doesn’t — exactly what happened.
As we warned at the time, asset prices can go down, while debt doesn’t — exactly what happened.-BR
that was Animal. A simple glint of a fundamental Truth, reflected into the miasma of a manic Market, should have provided, for anyone paying attention, Star, enough, to track out to safety..
past that, with ol’ gov, post #1, Those DowJones pubs have long been enstupified–they can keep their subs, tracking their Newsstand sales provides a useful Thermometer on the, relative, fever of the peep..
October 19th, 2008 at 10:06 am
Remember when energy prices were rising and the CW was that the rise would not hurt the economy because energy was a much smaller percentage of GDP than in the 70′s? Now the Epstein’s want it both ways by arguing that the consumer will get a windfall due to energy prices falling and things will be hunky dory. Wrong on the way up and wrong on the way down.
October 19th, 2008 at 10:15 am
I was just over at Roubini’s site, and he says that those who predict we’ve hit a bottom in the stock market are categorically wrong; I’d love to hear Epstein’s retort to this:
“So risks and vulnerabilities remain and the downside risks to financial markets (worse than expected macro news, earnings news and developments in systemically important parts of the global financial system) will dominate over the next few months the positive news (G7 policies to avoid a systemic meltdown, and other policies that – in due time – may reduce interbank spreads and credit spreads). So beware of those who tell you that we reached a bottom for risky financial assets. The same optimists told you that we reached a bottom and the worst was behind us after the rescue of the creditors of Bear Stearns in March, after the announcement of the possible bailout of Fannie and Freddie in July, after the actual bailout of Fannie and Freddie in September, after the bailout of AIG in mid September, after the TARP legislation was presented, after the latest G7 and EU action. In each case the optimists argued that the latest crisis and rescue policy response was “THE CATHARTIC” event that signaled the bottom of the crisis and the recovery of markets. They were wrong literally at least six times in a row as the crisis- as I consistently predicted here over the last year – became worse and worse.”
“So enough of the excessive optimism that has been proven wrong at least six times in the last eight months alone. A reality check is needed to assess the proper risks and take the appropriate actions. And reality tells us that we barely literally avoided only a week ago a total systemic financial meltdown; that the policy actions are now finally more aggressive and systematic and more appropriate; that it will take a long while for interbank markets and credit markets to mend; that further important policy actions are needed to avoid the meltdown and an even more severe recession; that central banks instead of being the lenders of last resort will be for now the lenders of first and only resort; that even if we avoid a meltdown we will experience a severe US, advanced economy and most likely global recession, the worst in decades; that we are in the middle of a severe global financial and banking crisis, the worst since the Great Depression; and that the flow of macro, earnings and financial news will significantly surprise (as this past week) on the downside with significant further risks to financial markets.”
October 19th, 2008 at 10:36 am
BR said:
And most economists understand why Oil is down — its called demand destruction. People stopped consuming it, because they cannot afford to. A global recession is deflating all manner of commodities. This is a bad thing, not a good thing.
Comment: On a superficial level, yes. On a fundamental level, oil was never worth $145, except to those who trade in oil prices. And they had the short term ability to force their greed onto the people of the world.
If oil was actually worth $145, then the world economies would have been crushed permanently going forward. Nobody except those who live at the top of the economic pyramid could afford it and purchase other items normally associated with disposable income. Only the most cloistered economist or most avaricious speculator would claim otherwise.
If demand destruction has occurred, great. Much was probably at the wasteful or marginal level. Using less oil is not a bad thing if it is because of more efficiency in the use of it. It is a good thing. Cash that would have gone to oil now will go to other aspects of the economy, fixing it and priming it for expansion in a hopefully more efficient way.
Transferring cash from the pockets of the common person to the pockets of astute commodity traders adds no value to society once the price finding mechanism is met and adequate liquidity has been provided. And no excuse that makes it seem appropriate will change that. Face it, credit and investment is going to shift from people who play hot potato with investments such as bets on the price of oil, to investments that make things and employ people.
Some of this investment will go to industries that allow people to continue to use less oil. So much for demand destruction being a bad thing.
On one hand, you are correct. If oil prices rise in tandem with rising stock prices, then cash will remain king. Only an idiot would put money in the markets because profits for all non oil companies will tank. The next few weeks will tell the story. Will newly flowing credit be used to build things or bet on oil prices?
If I am wrong, then the coming economy will match the one of centuries past … when wood for daily fires became scarce if you didn’t live near trees or when coal was scarce because of population growth vs the mining technology and transportation systems of the day.
October 19th, 2008 at 10:42 am
To pick up on a discussion we were having in an earlier thread, I did a lot of thinking on Saturday (this is what I do on weekends, unfortunately), and I think it is less constructive to consider price/sales or price/dividend than price/earnings when attempting to value the market as a whole. Here are my reasons:
Price/sales: this would be the least constructive in my opinion. Price/sales considers nothing of underlying profit margins. I’m just speculating, but wouldn’t the profit margin for a manufacturing-based economy be far less that that for a services-led economy? Wouldn’t it be misleading to compare the price/sales ratio during the Great Depression to that of today’s economy?
Price/dividends: I may be mistaken, but haven’t dividend taxation laws changed substantially over time? Doesn’t a corporation’s incentive to distribute dividends or retain earnings fluctuate given different dividend tax rates? Again, wouldn’t this make a comparison of price/dividend ratios over time apples-and-oranges?
It just seems to me that price/earnings ratios are a cleaner method of macro valuation and historical comparison, obviously if you use a multi-year moving average of earnings, and not just trailing 12 mos. or (god forbid) expected earnings.
October 19th, 2008 at 10:50 am
BR said:
If you make investment decisions based on Barron’s Economic Beat columns, you’ve lost a lot of money.
comment: This has always been true. The current economic situation has no bearing on the fact they are almost always wrong, except when they are accidentally right on occasion. Dog bites man.
October 19th, 2008 at 10:55 am
Gene Epstein is an idiot, but why waste
cyberspace discussing about some whacko
that is confused about reality??
October 19th, 2008 at 11:32 am
The question that I have is, to what extent does Gene Epstein write what he believes, and to what extent is he pressured by the editors of the magazine to adopt one perspective or another? The same question applies to the journalists on CNBC. If left to their own devices, would any of them admit that sometimes it is best to avoid the stock market on the long side?
October 19th, 2008 at 11:39 am
How can this guy work in the same building as Alan Abelson?
I’m not sure which article it was but a few yeas back Mr. Epstien gave this explanation that when one of the diffusion indices was actually at 47 plus – or so – actually meant it was more than fifty percent.
It’s called Algebra my good man.
October 19th, 2008 at 11:40 am
Dead Hobo, they say that dried human dung burns well, especially if you eat a lot of grains! lol
October 19th, 2008 at 11:41 am
“….This is economic cheerleading way, way beyond the ordinary mindless spinning. Its an entirely different order of magnitude. This guy makes my boy Kudlow look like a depressive….”
Barry:
He outKudlowed Kudlow,…. That’s quite the achievement, wouldn’t you say…?
Best regards,
Econolicious
October 19th, 2008 at 11:50 am
is the baltic dry index a leading economic indicator because it seem’s to be cliff diving also pakistan tried to borrow a couple billion from china china refused said that they done due diligence these are not good thing’s are they
October 19th, 2008 at 11:52 am
If you walk in a circle, are you making progress?
Banks will not lend because they fear the loans cannot be repaid, so the Fed and the Treasury is dumping trillions into the system so the banks will lend, yet lending to those who couldn’t repay is what got us here to start.
I am so confused!
October 19th, 2008 at 11:55 am
(yuck, no coffee yet) Fed and Treasury are
October 19th, 2008 at 11:56 am
While I definitely agree with your basic criticism of the article, I think it is asinine to say that oil has been cut in half simply due to demand destruction. I mean just how much demand has been destroyed since July? What would that make the price sensitivity to demand if oil dropped 50% due to a modest decrease in demand. If that is the price dynamic for oil, it will be $1000 per barrel by 2020.
In my opinion, there are definitely speculative forces at work in this equation. Oil prices have recently fallen off a cliff, just as they seemed to jump up one near the high price. I am looking for a bounce soon, as the short trade unwinds.
Finally, with the crack spread where it is, refiners should be making a killing…
October 19th, 2008 at 11:58 am
The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum’s recent slide…
I didn’t even keep reading after this. Is this guy serious? So let me get this straight, oil is going up, that’s why the market is having a hard time (couldn’t be the credit crisis or the shit economy right?) and now, we are just going to take off because gasoline prices are coming down.
What a joke, you can do some simple math to realize that this isn’t going to bring the consumer back. The family budget is still pinched (food, healthcare, college, etc. etc.) and the averaged consumer still too levered up (mortgage, credit card, auto loans, etc.) My guess is the current drop in gas prices will not provide a greater annual savings for the average consumer than the $600 given for the stimulus, we saw how great that was for the economy.
Anyone who thinks that the consumer will lead us out of this simply does not understand how tapped out the average consumer is. Why would I want to get excited about a consumer expansion or spending spree anyway, we need real expansion, not a new round of over spending.
Finally, this was never about oil, it’s about housing and until you go to the source we have problems.
October 19th, 2008 at 12:02 pm
Sorry, Barringo…
I’m going to have to dish some adult supervision.
When evaluating something said by some party, I decide to agree or disagree with its words and phrases, its opinions or intellectual observations, without being biased by what the party has said historically.
All that you quoted he said (take away the man… from the words) doesn’t stray too far from my own thinking… and that of Volcker… and Buffet.
I’ve always been keen to the observation that we have two problems: an economy that is challenged and on a clearly definable downtrend; but more important, an explosively volatile threat in the form of a crisis involving the c-u-r-r-e-n-c-y itself, the threat to the system’s capacity to facilitate ordinary e-x-c-h-a-n-g-e.
Yes, the cavalry has come, in spades… and yes, the risks are still high that the cavalry came too late.
But, the Walking Around Economy, the one I’ve told you about many times (W.A.E.) on this blog, is still in far better shape than this financial crisis would indicate. Is it going to slip to a very severe recession, even a depression? I don’t know, but I don’t think so.
–
More on the concept of intellectual agreement… and your lately demonstrated Man Love for Buffet:
I generally agree with Buffet regarding his commentary posted last week, but not because I have the highly expressed Man Love for him that most do.
Every little town in the Southeast (my haunts) has at least one used car dealer on the edge of town (really, usually just ONE and not more) with some common characteristics they share with Buffet:
-They’ll pull out a roll of hundred-dollar bills as big as a sheep’s head that they always have on them.
-They always have something that you want more than they want… and you always have something YOU want that they don’t want as much. They are the living personification of the spread between bid and ask.
-If you need tickets to the Big Game… they’ve got them… If they don’t, they can get them. If you’ve got them for sale and just can’t go, and they want to go more than a starving man wants to eat, they’ll still get them off of you for way less than you’re asking. The reason is that they will a-l-w-a-y-s want the d-e-a-l more than they want to eat.
-They’ve got 25 cents of every dollar they’ve ever made.
-They were bred to make money and they can make it from a hospital bed. They are money machines, born under a stellar formation that makes everything they touch turn to gold.
-If they want to put a U-Lock-It-You-Store-It across the street from you, and they need it zoned… the hearing notice will go up hours before the zoning hearing… and in 10 weeks you’ll be staring at sodium security lights that can be seen from the Arctic Circle, and they won’t give 10 cents worth of damn whether you like it or not.
-They are each in their own way, Buffet in gigantic magnitude, and the car dealer just small potatoes, exactly what Adam Smith warned us about in “Wealth of Nations” when he, undiscovered by O’Rourke, itemized his concerns about the dealer class among merchants and manufacturers.
There are two big differences between them and Buffet, however:
-They never managed to escape being just locals, but Buffet nationalized and internationalized his prowess. Buffet’s town was the whole world. Every one of those used car dealers could be a Buffet, if they could but expand their thinking and thus expand their horizons. They can’t see beyond their towns and counties.
-The other difference is that, unlike Buffet, they have not the slightest reason to convince people how bright they are, nor do they have a need to convert anybody’s opinion, let alone the public opinion.
Buffet likes to hear himself talk… way too much. And, so, what has he done to marginal people with his exhortations?… his chortling bullishness and his Becky Quick and Liz Clayman CNBC Pony Rides to the Orient and Omaha Attic-Diving and “turn left there, watch that dog!” Driveabouts and Walkabouts?… His The-Market-In-A-Hundred Years-Will-Make-You-Simple-Minded-Commoners-Look-Dumb chants?
Well, he’s been a very vocal and calming, reassuring voice for staying the course over the last few months… and look what it’s done to the marginal people, to those who may have been nearly capable of sustaining themselves with a reasonable retirement augmented with modest income capitalization from funds carefully and dutifully held on course, happily and contentedly, in abeyance with Buffet’s many public chortles.
Buffet has been little more than Novocaine to the general public… They needed to run screaming from the market, not to be anesthetized by Rip Van Buffet.
And, now he wants them to pile in to Americana.
What with?… Warren?… With what?
Yeah, I forgot… they can sell their government bonds now and put all that in the market. Yeah, that’s the ticket… sell the bonds now and put it in the market. So, hmmm?… Let’s see… say the public “I’ll take my bond money from my 401-k and put it in stocks now that the stock market has crapped the bed, but, OH NO!… I don’t have any bonds in my 401-k, because I’ve had my head up my butt in peaceful bliss about the stock market.”
Buffet’s Big Calming Mouth has cost them 30% or more in just days… even the few days prior to his Americanus Robustus remarks last week. And, now he’s there to clean them out… with all his cash that he was so confident about the market with, that he had it almost exclusively in government bonds.
“Oh, no…” he says now, ”that wasn’t m-y money you’ve seen floating lower in the market lately… all those billions and billions goin’ down… no, that was charitable money you’re thinking about. No, you see, now (chortle, chortle), I’m showing up with the REAL stuff… my money, that’s been in government bonds. C’mon, what did you think!… That I’d have been a big enough fool to have left that money in the market with you ignorant morons?… tell ya what… I’ll give you my bonds for your stocks… deal?”
Buffet needed an emotional and psychological Deus ex-Machina in order to avoid the embarrassment of being caught in a market he can’t get away from with billions and billions at risk… and his Big Becky Quick and Liz Clayman Lovin’ Mouth – beauties and treasures, both, no doubts by me!- unable to do anything about it.
He’s often “the market” himself, so I fully understand the rational observation that he couldn’t have escaped the downdraft even if he’d wanted to… but the Deus ex-Machina was his ability to keep “my money” in Treasuries, good old safe dependable Treasuries, with the yields screaming down to levels I’ve long predicted here on this blog repeatedly and without the slightest balking…
…and Bondie told you, too, Barringo… with style, with metaphor, with entertaining anecdotes, with tiny dramatic plays… and with characterizations and bed-time rhymes.
Now, the bed-time rhyme for tonight starts about mid-evening NYT, when we begin to see if Little Red Riding Hood is gonna get eaten ass-over-elbows by the Big Bad Wolf overnight in Asia and Europe. If so, and if in a BIG way, Buffet’s Novacaine is gonna start wearing off pretty soon.
October 19th, 2008 at 12:03 pm
Finally, with the crack spread where it is, refiners should be making a killing…
Posted by: Alex Sebastian | Oct 19, 2008 11:56:05 AM
Uh, they are, but it’s not on gas, try diesel
October 19th, 2008 at 12:03 pm
Reality interceding (Barron’s version aside)……a disruption in 9k supply chain mgmt? Shortages fortcoming?
As always, your mileage may vary…
Oct. 15 (Bloomberg) — Pacific Basin Shipping Ltd., Hong Kong’s biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.
“Letters of credit and the credit lines for trade currently are frozen,” Khalid Hashim, managing director of Precious Shipping, Thailand’s second-largest shipping company, said in Singapore yesterday. “Nothing is moving because the trader doesn’t want to take the risk of putting cargo on the boat and finding that nobody can pay.” (cont.)
http://www.bloomberg.com/apps/news?pid=206010878&sid=ahkq91XcsKnY&refer=home
October 19th, 2008 at 12:12 pm
Price/sales: this would be the least constructive in my opinion. Price/sales considers nothing of underlying profit margins. I’m just speculating, but wouldn’t the profit margin for a manufacturing-based economy be far less that that for a services-led economy? Wouldn’t it be misleading to compare the price/sales ratio during the Great Depression to that of today’s economy?
@Adam:
Valid point. I didn’t use P/S from the Depression…I used avg troughs from 1956-2000, the period including the greatest bull market in history, during which the market often troughed at .4-.55 times sales.
The higher profit margins recently have:
a) been in large part due to financial companies, and we know how that’s going
b) have been at all-time records and are a very mean-reverting data series.
P/S is immune from accounting magic. I could also argue that since we are moving away from capitalism towards socialism, the multiple paid should be lowered. But I generously will give the market a .7 times sales target. During the period I looked at, .7 was often seen at market TOPS, let alone bottoms…we are now at .96.
October 19th, 2008 at 12:16 pm
On a fundamental level, oil was never worth $145, except to those who trade in oil prices. And they had the short term ability to force their greed onto the people of the world.
I don’t know about the rest of the economy, but $5 gas is still a bargain, compared to the alternatives, for the utility it provides.
Sure, with $10 gas I’d start looking into natural gas or EV conversion, but while I still got a gasoline-powered car I’m going to pay the man to power it.
I mean, I pay $1750/mo in rent now, 10x my energy costs.
October 19th, 2008 at 12:24 pm
You’ve got to think too that people have fundamentally changed their behavior. Two areas I can think of are buying more economical cars and once again putting a priority on saving their money.
If they have done those in any significant way then that will be reflected in oil prices. It will also be good long term even though it will be bad short term economically speaking.
People need to come to grips with the fact that a fundamental shift has taken place and now the economy needs to adjust.
Also, what is the cost to get the oil out of the ground and light it on fire for its respective uses? Plus what are the costs of doing it with alternative energies? That plus a reasonable ROI is the price where oil should find equilibrium. Last I heard it was around $60 though I’d be willing to wager that it may be up to $75. Anything above that is rampant speculation if you ask me
October 19th, 2008 at 12:24 pm
If, as almost everyone suggest, that we are in a hyper-deflationary period why would the banks want to be lenders? Cash is King!
Depression II, here we come; lock your doors load up on the amo, and make sure you kiss you wife and kids good-night, every night.
October 19th, 2008 at 12:34 pm
Well done, Barry, go get ‘em!
Thanks for your continued efforts in revealing the truth.
October 19th, 2008 at 12:50 pm
I’ve been reading here for over a year now. I was never a trader, but I think I sensed the dire economic situation just from reading the news. This place seemed at least sane, because the host and commentators were at least discussing the obvious collapse-to-be.
So, as a non-economist, I have read the word “depression” and used it in conversation. But I never tried to define the term before. Just for starters, I looked to wikipedia this morning. There, “depression” is defined as being “[C]onsidered a rare but extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.” The article goes on to note that there is no officially settled definition.
But assuming people could agree that the above represents a fair definition, isn’t it time for talking-heads and the public-at-large to stop debating whether we are in a “recession,” and acknowledge that we are here. This is historic. And we are living through it. No amount of bull-crap changes the historical fact (unless we all just concede that we live in a “1984″-like world, where real history is lost down a memory hole, and we re-create reality by the minute).
Unemployment is over 8% in my state. That is by the baloney statistics that we now use which does not count discouraged workers or the chronically displaced who have just opted out of the reportable economy. Nor the underemployed. Is 8% by our measures the new 25%? Hard to tell with no trust in the information that is fed. But it certainly feels like abnormal unemployment here.
Restriction of credit. Seems like I’ve heard something about this lately.
Shrinking output and investment. Ahuh.
Numerous bankruptcies. Sure is here. I don’t know about official statistics on the issue. But my personal experience tells me we have this one covered around here.
Reduced amounts of trade and commerce. Seems that way.
Highly volatile currency valuations. I’m not an expert here. But I can’t seem to decide from day-to-day which currency I’d rather have my assets valued in. I’ve chosen the dollar (as a default because it is hard for a modest American to divest in the currency, and the Euro for 10% or so of assets).
Price deflation. Or hyperinflation. Seems like commodities are experiencing the first, and I’ve read much that suggests our attempts to print our way out of this mess will result in the latter. Again, not an expert, but this may also be discovered.
So why are we (as a society) not courageous enough to call our situation what it is? At least our recent predecessors weren’t so squeamish that they tried to avoid the real situation by having a phony conversation about how things were really okay. Then again, they had a Department of War. So, I guess we are terminally brain dead, able to accept all manner of word-play to try to avoid dealing with the realities of the situation. To quote the Boss, “Times are tough, and just getting tougher.” Let’s own up to it and start to deal with it in some productive way.
October 19th, 2008 at 12:55 pm
What I like about you BR is that you a very simple thing that people pay lip service to but few implement: the facts are everything.
And historical memory is subversive.
Keep em on the straight and narrow.
October 19th, 2008 at 1:03 pm
Adam @ 10:42:28 AM:
Article (10/18/08) by Brett Steenbarger on the subject of stock valuations using the “price to book” metric:
http://seekingalpha.com/article/100533-fundamental-valuation-how-low-could-we-go?source=headline1
quote:
“If we look at this market from a trading vantage point, it is hard to escape the sense that we’re tremendously oversold and due for a rally. In the short to intermediate term, that would not be surprising. If, however, we focus on fundamental valuations and historical norms, we’re not at all at historically highly undervalued levels”.
October 19th, 2008 at 1:26 pm
Barron’s has become pretty useless all around. Think of it as Kudlowfication.
Good ole Alan Ableson does seem to be the one exception. If he goes away I will cancel my subscription in a N.Y. minute.
Last weeks edition. I doubt I read even 10% of what was in there. Useless.
October 19th, 2008 at 1:33 pm
To follow up on dead hobo’s talk about trees and coal…
“The most important trend in energy production over the last two centuries is decarbonization, a trend that will see methane overtake oil and coal to become the next two generation’s primary fuel, said Jesse Ausubel, director of Rockefeller University’s Program for the Human Environment. Ausubel spoke at the Australian Petroleum Production & Exploration Association (APPEA) 2007 Conference in Adelaide.
“On average, when one removes the water, biomass fuels have a ratio of 40 carbon atoms to 4 hydrogen,” he said.
“Coal typically has about 8 Cs for each 4 Hs. Gasoline and jet fuel average about 2 Cs for each 4 Hs. Methane burns only 1C for each 4 Hs-one-fortieth the ratio of wood.”
Ausubel and his colleagues plotted the history of fuel in terms of the ratio of carbon to hydrogen and found a strong trend towards decarbonisation, with carbon losing market share to hydrogen. “The slow process to get from 90% C to 90% H in the fuel mix should take about 300 years and culminate about 2100,” Ausubel told the conference. “Some decades have lagged and some accelerated, but the inexorable decline of carbon seems clear.”
This trend is driven by the ever-increasing need for spatial density of energy consumption by the end-user, that is, the energy consumed per square meter, especially in urban areas.
“Fuels must conform to what the end-user will accept, and constraints become more stringent as spatial density of consumption rises,” he said.
Green energy metrics
Ausubel also questions the green credentials of renewable energy forms. “They may be renewable, but calculating spatial density proves they are not green,” he said.
“The best way to understand the scale of destruction that hydro, biomass, wind, and solar promise is to denominate each in watts per square meter that the source would produce. In a well-watered area like Ontario, Canada, a square kilometer produces enough hydroelectricity for about 12 Canadians, while severely damaging life in its rivers,” Ausubel said. “A biomass power plant requires about 2,500 sq km of prime Iowa farmland to equal the output of a single 1,000-Mw nuclear plant on a few hectares. Windmills to equal the same nuclear plant cover about 800 sq km in a very favorable climate,” he said.
“Photovoltaics require less, but still a carpet of 150 sq km to match the nuclear plant. And a car requires a pasture of a hectare or two to run on biofuels-unwise, as the world’s vehicle population heads towards one billion.” Ausubel concluded, “No economies of scale adhere to any of the solar and renewable sources, so trying to supply India or eastern China would require increases in infrastructure that would overwhelm these already crowded lands.””
October 19th, 2008 at 1:50 pm
Dear Gene,
OPEC is a cartel. In their last meeting they agreed to cut production to battle the falling price. While we’re on the the topic, it should be noted that domestic drilling would create lots of jobs but it won’t suppress prices for long as OPEC will adjust production down for the new supply that we add plus energy prices are determined by the global market so don’t think any domestic driller will take less than the the maximum price. By the way, could you please tell the presidential candidates to stop associating nuclear power with oil since they are unrelated.
Sincerely,
Bud Melman
October 19th, 2008 at 1:59 pm
Seeing things in isolation is precisely what got us into this mess. With his track record it’s a wonder anyone reads him. Of course, he may be like the broken clock that’s accurate twice a day.
October 19th, 2008 at 2:40 pm
Please advise me. I have not bailed out of the market, although I was tempted to with these horrific swings. Is it too late to bail now? Should I hold in there? My portfolio is 70 percent stocks (mutual funds) and 30 percent bonds. I will retire in 5 years, but won’t necessarily need much out of my account for about 7 years. Thanks, I am so confused. My portfolio is shrinking fast and I am alarmed and staying awake worrying about it. Have most people shifted their stock mutual funds to money markets and bonds? IS this what I should do even at this late date? Please help.
October 19th, 2008 at 3:05 pm
You are on the right path — asking random strangers at online message boards is definitely the way to go!
October 19th, 2008 at 3:16 pm
the thing about gene is that he is perfect idiot.
October 19th, 2008 at 3:33 pm
Spatial Density BS
This is nonsense. It’s ok to cover the entire country with farms to grow food, but not ok to cover a small portion of desert to provide heat?
wft ARE YOU STONED or what?
Tell me please why food is more important than staying warm and getting to work?
“Ausubel also questions the green credentials of renewable energy forms. “They may be renewable, but calculating spatial density proves they are not green,” he said”
October 19th, 2008 at 3:38 pm
“Why GDP Will Keep Growing (SEPTEMBER 29, 2008) Thanks to high Imported Oil prices, GDP looks better than it is (high imported Oil makes the deflator artificially raise GDP.”
Although, I don’t have any big issue with the rest of Barry’s article, this is just wrong. Barry’s statement implies imported oil prices would distort the “true” real GDP. But the GDP is supposed to measure the price sum of the domestic product. Therefore, the imported stuff is being subtracted. The price change of imported stuff has to be subtracted from the GDP deflator, accordingly, or, better formulated, the price change of imported goods has to be subtracted from the price change of all goods to get the GDP deflator. There is nothing made look better “artificially” when calculating the real GDP with this approach. Now, whether prices are sampled with sufficient accuracy by the government employees and how exact the GDP statistics are is another question. But, I don’t think that’s what Barry is talking about.
How is the real GDP supposed to be calculated otherwise? Subtracting the prices of the imported goods, but not the price changes of the imported goods from the price changes of all goods to calculate the real GDP change? This would just be methodological nonsense.
The GDP deflator is not the same as the inflation rate. The inflation rate also includes imported goods. The GDP deflator doesn’t.
I wonder whether Barry will says that the real GDP was “artificially” lowered, when the next GDP statistics are out, since imported oil prices or, generally, prices of imported commodities are falling strongly now. Falling prices of imported goods increase the GDP deflator making the real GDP lower than it seems to be w/o including the falling prices of imported goods. But in this case it would be wrong also to say, that the real GDP was “artificially” lowered because of falling import prices.
rc
October 19th, 2008 at 4:21 pm
This is basically the Barrons version of Don Luskin’s Sep 14th article in the WashPost. Only it seems extra stupid considering we’re shoveling TRILLIONS down the rabbit hole, an anti-denial denial.
October 19th, 2008 at 4:23 pm
I just want to be exact. I wrote:
“The GDP deflator is not the same as the inflation rate. The inflation rate also includes imported goods. The GDP deflator doesn’t.”
Although this isn’t wrong, it might be misleading somewhat. The inflation rate includes price changes of imported goods, but excludes price changes of exported goods. In contrast, the GDP deflator excludes price changes of imported goods, but includes price changes of exported goods. The GDP deflator is defined according to the definition of the GDP, which is calculated by the sum of domestic consumption, gross investment, and government expenditure to which exports are added and from which imports are subtracted.
rc
October 19th, 2008 at 4:31 pm
Eclectic,
I agree with you 100%. The people that write for Barrons have a constituency that thrives on legalized theft while the PR they buy is telling us how lucky we are and what sane, wise, prudent, studious, cautious, concerned financial leaders we have. Just think of what’s on the line here if the PR fails, the econospinning is revealed for what it is and business education beyond grade school math is discredited. All those “credentials” from all those fine colleges and universities worth nothing. A lot of wind bags looking like prunes. A lot of jobs in PR and business equated with Mafia apprenticeships. No, we can’t have that. Well, Eclectic and myself along with a great many others are awake. We aren’t buying the hype. Raqueteers, you’re going to have to work for a living.
And as to GDP, it was Greesnpan, yes, Alan Greenspan, in 2005 that released a study showing home equity extraction (refinancing and lines of credit) effect on GDP. Maudlin covers that in detail. Google it. It turns out that without the home equity extraction (which would have been impossible without super low interest rates) we would have almost ZERO GDP growth from 2002 to now. It was all a rather successfull coordinated ponzi scheme with good PR. If you don’t like that then I suggest you refinance your home and buy Goldman Sachs and GE shares.
The very idea that we are such incredibly stupid morons that we need stratospheric oil price gouging to move us into alternate energy is ridiculous. Anyone here would jump at the chance to get free energy from rooftop tiles. Anyone arguing otherwise has an agenda. Amortization is another cop out. Depreciation costs in business allow purchase and replacement of all kinds of the latest crap. The homeowner can’t take advantage of this because of gamed tax codes. Did you notice how quick those flat panel displays got into your doctor’s office? The truth is that we will change to a reasonable source of energy when the depraved bastards that run the oil cartel have squeezed the last buck out of us.
No, I’m not depressed; I’m simply not coopersting. This is the best survival tactic. Don’t get mad, get even.
October 19th, 2008 at 4:47 pm
Saw the piece in Barron’s first, and then your excellent dissection. I used to think that guy was just a somewhat kooky, contarian economist, but now I think he’s a nutball advocate from the Kudlow-ian school of “Goldilocks 2.0″.
October 19th, 2008 at 4:47 pm
wft ARE YOU STONED or what?
Posted by: Bob A | Oct 19, 2008 3:33:29 PM
Dude, like….totally, yeah…so I was thinking, like, we could plant California, like, uh, the whole state, dude…plant the whole state in hemp man…it’ll be fuckin awesome dude..like plant the whole state with hemp and then..dude check this out…we elect Obama right…and then we set the whole state on fire…like that already happens yeah, totally,…. so then see…dude…after Obama crams the globalist agenda down our throats and deals away our national sovereignty … then we light California on fire man, like whoosh, everybody’s seeing rainbows and unicorns….and we can be distracted with green energy and silly dumbshit that won’t work anyway man, but nobody cares man…happy times….happy times dude
October 19th, 2008 at 5:43 pm
Improve your investment results $200 per year; don’t buy Barrons.
October 19th, 2008 at 6:19 pm
Crank Yankee,
I live in Vermont and I’m as cranky as they get so we should be kindred spirits. I used to use 500 gallons of heating oil a year. Now I use about 10 or 15. That’s what I call demand destruction. All that “shit” you say never works is working just fine in Vermont. People are switching to things that really work. Did you know that washing machines and refrigerators were invented and patented BEFORE the end of the 19th century? They weren’t put into common use until the 1920′s because it took until then for the government to subsidize electrification. The government subsidized railroads in the 19th century which helped build all those great “free market” Darwininian, survival of the fittest, “government is the problem” magnates. Such hypocracy is breathtaking but really, for these guys, par for the course. Did you know how most of the New England fortunes were built? Yankee ingenuity? Hard work? Self Sacrifice? Nose to the grindstone? Nope. Try war profiteering. Same thing after the civil war. Hell, New England didn’t let Texas and California get in on the action until World War I. What we were taught is absolute fairy tail myth making horseshit. Be proud! We are some of the baddest “dudes” that ever walked (raped) the face of the earth and with your help, we may even finish the job, pal.
October 19th, 2008 at 6:25 pm
Bob A.
I may be in my sixties but I still must say that YOU RULE, DUDE!
October 19th, 2008 at 6:34 pm
thank you
October 19th, 2008 at 6:38 pm
More on Spatial Density BS
… and by the way something like half the effing greenhouse gases on the planet come from freaking COWS FARTING!!!
so you can drink milk and eat beef and cheese!!!
“Ausubel also questions the green credentials of renewable energy forms. “They may be renewable, but calculating spatial density proves they are not green,” he said”
October 19th, 2008 at 6:39 pm
But Barrons is worth reading for Alan Ableson & the interviews, but only for them.
October 19th, 2008 at 6:47 pm
AGG,
with this: “Did you know how most of the New England fortunes were built? Yankee ingenuity? Hard work? Self Sacrifice? Nose to the grindstone? Nope. Try war profiteering. Same thing after the civil war.” a minor point, you’re missing the Drug Running..
and this: “All that “shit” you say never works is working just fine in Vermont. People are switching to things that really work” no doubt, but those alt.energy solutions are geared to ‘distributed’ energy gen. systems..
the point about ‘spatial density’ is, actually, a good one..also, it’s telling that most ‘greens’ don’t mention the tremendous costs of traditional Hydro-dams..
past that, I agree, and Eclectic’s post was a great one..
@betsy,
you may care to send BR an e|mail filled w/ the description of your 401(k), the funds that are in it, and whatever else you think is germane..
October 19th, 2008 at 6:51 pm
Oil was hyper-inflated by speculation, low dollar, and poor equities. REALLY inflated.
Lower oil IS good and WILL ease the coming pain. OPEC is a laugh to me because they are like everybody else,..a day late and a dollar short, blinded by profit and price I guess??? Sorry dip shits, soccer mom has a Prius and a hankering to be green. Less dependent is good.
Peak oil my Arse,…Huh Rick??
How about some fodder for Justin and his tin foil pump…I went to a local pawnshop to look at a couple hunting rifles for my son. Place was packed with J6P buying….wait for it…pistols and ammo. Crazy busy like I have never seen.
Silly really,… buy a cheap shotguns and saw them off. Good mean dogs are nice too.
October 19th, 2008 at 7:52 pm
This article on Bespoke gives some support to Epstein’s thesis:
Commodities: From a $500 Billion Tab to a $200 Billion Windfall
The impact of commodity prices on consumers’ wallets continues to sink lower from its highs in early July. At the peak of the commodities bubble in July, the average daily impact of higher commodities was costing the average American an extra $4.77 per day in 2008 versus 2007 (or about $523 billion in total). Now just over three months later, that ‘tax’ on the consumer has turned into a windfall of $2.00 per day or $220 billion in total. While the $4.77 a day ‘tax’ surely hurt the already strapped consumer this year, the reversal to a $2.00 per day windfall should provide some relief.
http://tinyurl.com/6xm7jv
October 19th, 2008 at 8:08 pm
Not sure what the animosity toward spatial density is other than maybe you’re a green fanboi?
Maybe your animosity would be better directed at “THE MAN”…notice THE MAN owns the university ( full paper in pdf : phe.rockefeller.edu/docs/appeaausubel12april.pdf) the author hails from. THE MAN knows a thing or two about energy I’d guess.
Historically speaking, has it ever paid to bet against THE MAN? Usually what THE MAN wants he gets and he does it by deception so the monopoly remains unscathed.
My best guess would be THE MAN loves global warming because it further enhances pricing power for the monopoly while also encouraging a WORLDWIDE TAXING scheme. (lots of smarts idiots sucking off the foundation money tit helping advance slavery – http://www.thebulletin.org/web-edition/roundtables/carbon-tax-vs-cap-and-trade)
Holy shit what a bonanza for megalomaniacs!!!!!
Ya’ll can stand in cornfields and wait for dollars to fall from heaven. My bet goes on nanotech and efficiency helping keep the cartel intact.
October 19th, 2008 at 8:40 pm
The oil bubble was partially driven by the the credit bubble. While demand destruction is occurring, the 147.00 peak was not strictly driven by fundamentals in supply and demand. It was significantly driven by the supply of credit and the over supply of financial players such as hedge funds. So we have demand destruction of the commodity, supply destruction of the speculators, and deleveraging.
October 19th, 2008 at 8:47 pm
(lots of smarts idiots sucking off the foundation money tit helping advance slavery – http://www.thebulletin.org/web-edition/roundtables/carbon-tax-vs-cap-and-trade)
Holy shit what a bonanza for megalomaniacs!!!!!
Ya’ll can stand in cornfields and wait for dollars to fall from heaven. My bet goes on nanotech and efficiency helping keep the cartel intact.
Posted by: Crank Yankee | Oct 19, 2008 8:08:17 PM
CY,
no kidding! as a + keep an eye on ‘Filtration’–at the intersection of nanotech y efficiency..
October 19th, 2008 at 9:51 pm
Here is a revolutionary statement:
Energy is cheap.
Middle men know this. They use PR, bait and switch, captive markets, expensive ink and cheap printer business models to get you used to say, the internal combustion engine. There were lots of elctrics around when Henry Ford started up. He made his cars cheaper and away he went with the help of Standard Oil. An average house needs about 15kw of power. Now if zoning allowed it, a tower with gearing to raise a stone a sufficient height daily would provide this power when the stone descended with it’s weight being the power source. Raising the stone would be a matter of various energy inputs. Am I advocating this new “stone” age. No. I’m just pointing out that 99% or more of energy costs are administration and taxes. The only reason the government doesn’t subsidize individual homes to buid multi-source power plants is because the Oil and Power companies don’t want this to happen. Everything else, including relative efficiencies or whether it’s green or not have no bearing right now. It’s all about lobbying (bribing) power. THE MAN is still there screwing everything and everybody (including himself).
October 19th, 2008 at 9:51 pm
@Posted by: BostonJoe | Oct 19, 2008 12:50:51 PM
You’ve made some good points Joe. I think the reason no one is calling it a depression is the lack of soup lines. Agricultural production has become a lot more efficient and a lot cheaper since then and thus soup lines may not show up this time around. They may be just around the corner too.
The one image that most people would probably equate with depresssions is the soup line and since that is absent it isn’t quite ‘clicking’ for them
October 19th, 2008 at 10:51 pm
Posted by: AGG | Oct 19, 2008 9:51:12 PM
that’s what’s up, AGG.
Our whole Economy is Predicated on Waste and fueled by Fiction, to generate Friction, enough, to burn us out..
If we could be any more Stupid, it’d be a miracle–Truly, the only kind of Revolution to Evolve to Devolve that will be encouraged, from without..
October 19th, 2008 at 10:53 pm
@DavidB: Maybe that’s why I ranted like that. I actually saw a soup line forming behind my office last week. I work in a tough part of town for the low rents, and there was a charity food bank in the parking lot. The lines were long. The poor people in this neighborhood obviously are in great need. I was kind of struck by the sight.
October 19th, 2008 at 11:49 pm
Good takedown. The truth is that he is not the only perma-bull in that shop. It is depressing to see what has happened to one of the greatest investment papers turned rag.
I can tell you stories of times I had spoken with Barron’s writers about short ideas like VMW @ $100, COF @ $50, MA @ $350 and a dozen others. Only once did they pick up an idea…it was LONG..(duh)
Homegrown is the only solution..
Disgusted…
Andrew
October 20th, 2008 at 11:23 am
Compare the number of people in the US today with 20 years ago. More people working. Maybe the new dream of retiring early is going to be shattered and the 3 car 2 house wealth map not realized by as many, but to think we are in a dire situation and that the economy is as bad as the newspapers report is just naive.
Just wait – once the election is over the newspapers will stop slamming the economy so hard and if Obama wins actual optimism will return to the ethically bankrupt mass media.