The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

November 13, 2009
By John Mauldin

If This is Recovery, Where Are the Taxes?

Last Business Standing

Stimulus, What Stimulus?

The Reality of Unemployment

Let the Good Times Roll

The Quick Double-Dip Scenario

Phoenix, New York, and Thoughts on the Internet

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No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales. This week we look at how taxes are doing in a period of economic recovery. Then we turn our eyes to a very interesting (and sobering) analysis of possible future unemployment rates. This is an anecdote to the happy-face analysis of employment numbers you get from establishment economists. There will be a lot of charts and tables, so this letter may print a little longer, but I think you will find it very interesting.

If This is Recovery, Where Are the Taxes?

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let’s look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we’re in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called “Beyond California” (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover mid-sized and up retailers, leaving out smaller businesses. Further, if you are a retail chain that has closed 10% of its stores, the remaining stores should in theory benefit from getting your loyal customers into them.

Last Business Standing

Yesterday I was with an associate, and I hesitated in asking them how their business was doing, because I knew things had been tough at the beginning of the year. But I did ask, and they said sales were up over the last months and business was looking better. Surprised, I asked them what made the difference. “Ah,” they said, “less competition. Our competitors have gone out of business.”

Best Buy and other electronic retailers had to benefit from Circuit City disappearing. That is Schumpeter’s creative destruction at work. Not very good for total employment, but it does help the profitability of the survivors.

So, if things are so bad, how did we have 3.5% growth in the third quarter? First off, things are not as bad as they were in the past year. We are in fact getting close to an economic bottom, at least for now. Second, the 3.5% number is a preliminary estimate. A study by Goldman Sachs suggests that the number will be revised down by at least 0.5% and maybe as much as 1%.

Why? The estimate does not really take into account how poorly small businesses are performing. If you look at small-business indexes and compare them to historical GDP numbers, you get the smaller number mentioned above. And since at least 2% of the GDP was from the stimulus package (Cash for Clunkers, houses, tax cuts), the economy on its own was flat. That begs the question, what happens when the stimulus runs out?

And the answer is that we won’t know for some time, as the stimulus is just getting ramped up. “According to CBO estimates, only 21% of [the stimulus] spending will occur in 2009; another 38% will come in 2010, and 22% in 2011. After that, its effect will dissipate quickly.” (The Liscio Report)

But David Rosenberg notes that what the federal government is giving, the states are taking away. The Pew Study shows that at least nine other states are in appalling shape, so it is no wonder that David writes:

Stimulus, What Stimulus?

“Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?

“The states are filling around 40% of their fiscal gaps with the federal stimulus (so much for spending on “shovel ready” infrastructure projects). Even after the fiscal help from Washington, the state governments will still face a projected deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the restraint in the state and local government sector is estimated to drain a full percentage point from U.S. GDP growth in 2010 and more than fully offset the stimulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market.”

The Reality of Unemployment

All this is, of course, going to put continued pressure on employment. As I noted last week, the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey, not the 190,000 you read about in the mainstream media. Unemployment is sadly continuing to rise by significant amounts.

Read the rest of this entry »

Floyd Norris channels Dickens to discuss the Worst of Times (employment wise):

“The overall unemployment rate, which reached 10.2% on a seasonally adjusted basis last month, remains below the post-World War II peak of 10.8 percent, reached in late 1982. But the proportion of workers who have been out of work for a long time is higher now than it has ever been since the Great Depression.

The persistence of joblessness for so many people — 5.6 million Americans have now been out of work for more than half a year even though they have continued to seek employment — may provide the greatest challenge for the Obama administration if it decides to seek a new economic stimulus program.”

The NYT graphic nearby (click for larger size) shows how rapid and steep the rise in Unemployment has been what compared to some other ugly eras.

This certainly isn’t the Best of Times, at least one indicator seems to be  improving:

“The short-term unemployment rate — the proportion of the work force that has been jobless for less than 15 weeks — has begun to decline, however, and stood at 4.5 percent in October after peaking at 4.9 percent in May.

That decline is a signal that the recession, which officially began in December 2007, probably has ended. In past recessions since World War II, the National Bureau of Economic Research has always dated the end within two months of the peak in short-term joblessness.”

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Source:
Job Losses Mount, Enduring and Deep
FLOYD NORRIS
NYT, November 13, 2009

http://www.nytimes.com/2009/11/14/business/economy/14charts.html

via Minyanville

click for video

This morning’s Barron’s references Randy Zisler, who runs a RE investment fund out of his office Zisler Capital Associates in Marina del Rey, California.

Zisler has been a real estate investor for some time, and correctly called the top in RE in 2006. His firm recently put out a report entitled “What Causes Bubbles and Crashes, and What Can We Do to Prevent Them?”

The short answer to the first question is excessive and imprudent leverage. Three years into the RE collapse, the deleveraging process has destroyed the credit bubble fed rise in equity. Zisler notes that “Most leveraged equity invested in real estate from 2005 has evaporated, as property prices, if marked to market, have fallen 30% to 50%.” He expects a further decline in CRE property values next year (office, retail and industrial), but envisions an upturn in 2011.

That’s the good news; The bad news is a “massive repricing of all commercial real estate;” Zisler warns of a “crisis of unprecedented proportions”approaching:

“Of the $3 trillion of outstanding mortgage debt, Randy points out, $1.4 trillion is slated to mature in four years, and he estimates another $500 billion to $750 billion of defaults. Maturing debt will have a tough time finding lenders. Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.”

Zisler’s Slide Show was included in the California State Controller’s Office report on the state’s finances; You can download it at their site; more of Zisler research can be found at their own website.

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Sources:
Bubble Slide Show from the ULI Presentation
Zisler Capital, 11/9/2007
2009 Research

http://zislercapital.com/research.asp

Mind the Gap
ALAN ABELSON
Barron’s NOVEMBER 16, 2009

http://online.barrons.com/article/SB125815697982347765.html

Download Speculative Bubbles

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This is truly a Friday Night Jazz: Via the NYT, we learn that Wolfgang’s Vault has a substantial collection of pristine audio recording from the Newport Jazz Festival.

Some of the recordings will blow you away — I suggest the Count Basie concert, but all 3 are excellent (free registration required).

There is also Art Blakey and the Jazz Messengers (1959) and Dakota Staton (1959).

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Thank me after you’ve listened to some of these gems . . . more stuff after the jump

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Source:
Historic Sounds of Newport, Newly Online
BEN RATLIFF
NYT, November 10, 2009

http://www.nytimes.com/2009/11/11/arts/music/11vault.html

Read the rest of this entry »

Some reading for a Friday afternoon:

• Is Gold a six thousand year-old bubble? (FT)

• Market Ignorance is Bliss (The Street.com)

• The Real Danger of ‘One Big Regulator’ (WSJ) What if those in control don’t believe in oversight?

• The ‘Real’ Unemployment Rate (Market Talk)

• Corporate insiders betting on the rally continuing (Marketwatch)

• As Shipping Slows, Banks and Carriers Fear Loan Defaults (NYT)

• The Biggest Wall Street Conspiracies (Big Money)  I disagree with the oil conspiracy, for reasons enunciated here.

• A bailout twofer:

-A decade after Glass-Steagall’s repeal, it’s time to reverse Sandy Weill’s legacy (Daily Finance)

-J.P. Morgan’s Dimon Takes On Washington’s Big Bank Critics (Real Time Economics) — We shoulda let Bear fail, just to see the cocky Dimon scramble to cover trillions in derivative exposure.

• After Bankruptcy, G.M. Struggles to Shed a Legendary Bureaucracy (NYT)

• Google to Newspapers: learn how to use Robots.txt (Inquisitr)

• The Art Market Shows Signs of Life (WSJ)

• The graph the record industry doesn’t want you to see (Times Online) Record labels may be in trouble, but musicians are doing relatively fine…

What are YOU reading?

Via Wall St Sheet Sheet

Terrific Article in the FT on Fed Hawks & Doves:

STRONG DOVES

Janet Yellen, president, San Francisco Federal Reserve

Leading dove on the committee. A heavyweight former senior economic adviser in the Clinton White House who recently joined the Group of 30 leading global policymakers. Expects the recovery will “look something like an L with a gradual upward tilt”. Believes the output gap exerts the dominant influence on prices and that “economic slack and downward wage pressure are pushing inflation below rates that are consistent with price stability”

Eric Rosengren, president, Boston Fed

Has a special interest in the problem of banks “too big to fail”. Thinks the recovery is “quite capable of falling short” of market expectations. Like Ms Yellen, is worried about inflation falling too low and fears premature tightening. Says rate policy should be based on the understanding that, “We need the economy to grow rapidly enough that unemployment falls substantially and inflation settles at a rate near 2 per cent”

MODERATE DOVES

Donald Kohn, vice-chair, Federal Reserve board

The most influential figure after chairman Ben Bernanke, Mr Kohn is an anchor against pressure from hawks. Defends the dual mandate, and a focus on core inflation and the output gap, saying the Federal Reserve act requires the Fed to consider the “level of output relative to the economy’s potential” alongside the inflation rate. Thinks “the persistence of economic slack” will keep inflation subdued and worries about inflation falling too low

William Dudley, president, New York Fed

Succeeded Tim Geithner as head of the New York Fed, a pivotal position in the system. Sees a recovery “less robust than desired” because of headwinds from the banking sector. Distinguishes sharply between the “how” and “when” of exit strategy, and stresses that the Fed’s preferred option is not to sell its portfolio of assets back into the market. Says, “We face meaningful downside risks to inflation over the next year or two”

CENTRE

Ben Bernanke, chairman, Federal Reserve board

The chairman defines the centre of the committee and fashioned the radical “credit-easing” strategy that is now winding down. Shares the doves’ belief that there is a large output gap that will put considerable downward pressure on inflation but puts more emphasis on inflation expectations as an autonomous factor. Last year edged the Fed away from an exclusive focus on core inflation; is not indifferent to dollar weakness

Daniel Tarullo, governor, Federal Reserve board

An Obama appointment with close ties to the White House, he is an expert on regulation and leads the Fed’s overhaul of financial supervision including bankers’ pay. Has not taken sides in the debate over monetary policy. Says pay should be viewed as a “safety and soundness” issue, and wants to avoid a “formulaic approach” to achieving this. Favours stronger capital and liquidity requirements for banks and more co-ordinated bank supervision

Elizabeth Duke, governor, Federal Reserve board

The former banker has remained relatively quiet in public on monetary policy, though she is an influential voice on the banking sector and credit trends. A few months ago she judged that the “decline in lending is not tremendously large relative to the experience of past business cycle downturns” and that the credit crunch was less intense than that of the 1990-91 recession thanks to massive policy interventions

Charles Evans, president, Chicago Fed

Has gone further than others in putting a time frame on the first rate rise – “most likely to be towards the end of 2010/11” – though that assessment is not set in stone. Gives weight to the output gap and inflation expectations. Says “resource gaps remain substantial today. That’s a significant mitigating factor against inflation pressures”. Also sees inflation expectations as a “powerful determinant of inflation”, the stability of which cannot be taken for granted

Dennis Lockhart, president, Atlanta Fed

Centrist leaning recently towards the dovish, with fears about the underlying strength of the recovery. Notes that “both the data and anecdotal descriptions of ground-level reality are quite mixed”, with foreclosures, unemployment, income and bank failures continuing “to disappoint”. Is “particularly concerned about interaction among bank lending, small business employment” and commercial property, with small businesses reliant on credit from troubled banks

Sandra Pianalto, president, Cleveland Fed

A centrist with dovish tendencies, she says: “We have a lot of ground to make up before we even get back to the levels of output seen in 2007”. Sees “considerable slack” and “tangible evidence” that this will help keep inflation subdued. But still sees the inflation outlook as “uncertain”. Why? Inflation concerns relating to the Fed’s swollen balance sheet “must be taken seriously” even if policymakers think these concerns are misplaced

James Bullard, president, St Louis Fed

Centrist leaning towards the hawkish, says uncertainty over inflation is “as high as it has ever been since 1980”. Still sees a lingering deflation risk but, beyond that, an inflation risk. An independent thinker, he shares some positions with doves and some with hawks. Has little time for output-gap analysis – thinks the Fed should start tightening as soon as strong job growth resumes. Favours selling assets rather than raising rates to begin with

Narayana Kocherlakota, president, Minneapolis Fed

Newcomer who took office only last month. No policy views yet expressed

MODERATE HAWKS

Kevin Warsh, governor, Federal Reserve board

The DC Fed’s ambassador to Wall Street, he puts more weight than others on the upswing in financial markets as a “forward-looking sign of growth and inflation prospects”. Is optimistic about a “positive feedback loop” between market strength and economic activity, but is watching asset prices carefully. Warns against waiting until the economy is back to normal before raising rates and says when the Fed tightens it may have to do so rapidly

Richard Fisher, president, Dallas Fed

Former über-hawk, moving towards the centre. Thinks the recovery will look like “a check mark” with a slope “that is less than desirable and might possibly be repressed by an occasional pause”. Worries that businesses will be slow to start hiring again. Says “inflation is likely to remain subdued for a time” but fears Fed guidance on rates may be fuelling the dollar carry trade, which could end in a disorderly adjustment in asset markets

STRONG HAWKS

Charles Plosser, president, Philadelphia Fed

Thinks “the good news will increasingly outweigh the bad news” on growth and views unemployment as a “lagging indicator”. Sees little near-term risk of inflation but “greater risk of high inflation in the intermediate to long term”. Deeply sceptical about output gaps; says the crisis has hit potential output as well as demand. Troubled by the Fed’s interventions in private credit markets and wants to get back to more rules-based policy

Jeffrey Lacker, president, Richmond Fed

Prioritises inflation expectations and is sceptical about output-gap analysis – which he says “greatly underestimated inflation” in the 1970s. Fears ongoing Fed asset purchases will push bank reserves beyond desired levels at which point policy will become much more stimulative. Sees inflation as medium-term risk and wants Fed to tighten “when growth becomes strong enough and well enough established” – but admits it is not certain that this will come in 2010

Thomas Hoenig, president, Kansas City Fed

Was first to raise the need for the Fed to tighten in a timely fashion in June, with the words “as the economy begins to recover, even at a modest pace . . . the current level of monetary accommodation will need to be withdrawn”. Concerned about banks “too big to fail”. Worries about excess reserves and appears keen to get away from near-zero rates. Says “moving from zero to one per cent, for example, is not tight policy”

Good stuff~!

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Source:
US Federal Reserve: An eclectic aviary
Krishna Guha
FT, November 12 2009 21:15

http://www.ft.com/cms/s/0/9a90fdb0-cfc6-11de-a36d-00144feabdc0.html

Getting trader’s edge from the NYSE, with Art Cashin, UBS Financial Services.

Fri. Nov. 13 2009 | 8:58 AM ET

Here is yet another rally comparo — this one looking at all major market rallies of the last 109 years.

The Dow has begun a major rally 27 times over the past 109 years which equates to an average of one rally every four years — most major rallies (73%) resulted in a gain of between 30% and 150% (29.8% to 150.5% to be exact) and lasted between 200 and 800 trading days (9.5 months to 3.2 years):

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courtesy of Chart of the Day

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I think a more informative chart would look at bear market rallies, rather thasn include secular bull markets. It skews the run towards the longer time line.