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

Are We There Yet?
July 30, 2010
By John Mauldin

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Are We There Yet?
Driving with No Spare
A Muddle Through Economy
Absent a Policy Mistake
Maine and Turks, Etc.

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“… [this economic condition] has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.”

- Friedrich August von Hayek, Nobel Speech 1974

Those of us who have taken young children on long road trips to somewhere they wanted to go are familiar with the plaintive question “Are We There Yet?” As a nation and indeed the developed world, it is not unreasonable to be asking “Are We There Yet?” about the road to recovery. The NBER, those self-appointed economists who are the official keepers of the score sheet of recessions and recoveries, have yet to tell us we are out of recession. Yet the economy is growing. Kind of. Today we look at the most recent data on second-quarter US GDP (which came out this morning), and even though it is backward-looking data, we’ll see what we can discern that might help us chart the direction of the future. And then, if there is time, I’ll highlight what is a very serious and growing problem for our state and local governments. There is a lot to cover and so, with no “but firsts,” let’s dive in.

Are We There Yet?

The economy of the US grew at a weaker than expected 2.4% in the second quarter, but the first quarter was revised back up to 3.7% on the strength of stronger-than-projected inventory rebuilding. But the recession years were revised downward rather significantly for this late in the cycle. We find now that the recession was worse than we thought, taking the economy down a total of 4.1% during the recession. As of today, we are not quite back to where we started, still down 1%. That means it is quite possible that we could finish the year and still not be “there yet.” (To see a 1% rise in GDP we would need to see a 2% annualized rise for the rest of the year. We’ll look at that possibility in a few paragraphs.)

Let’s look at a few charts courtesy of the Dismal Scientist, at www.economy.com. First, recent GDP numbers:

If this were an average recovery, the economy would be growing at a 6% rate at this point, which pretty much says it all about our current 2.4% number. Further, 2.5 years after the beginning of a recession, we are typically already 8% higher than the prior high. This is a very tepid recovery, indeed.

Now, let’s look at the actual numbers.

There is a category called “Final Real Sales” you can create by subtracting the inventories number from the real GDP number. That reveals that final real sales grew by 1.3% last quarter. This is against what is normally a 4% number this far into a recovery. Is it any wonder that small businesses are asking “When will we get there?”

Next, look at the contribution from fixed residential investment. It has been negative or flat for six of the previous seven quarters. This time it added 0.6% to last quarter’s GDP. But the housing market is lousy. What gives?

Read the rest of this entry »

(Invictus here, kids.  Don’t go bashing BR.)

I learned two interesting things last week:

Erick Erickson told me the following (bold font is mine, bold claim is Erickson’s):

Likewise, after the 2003 tax cuts, the unemployment rate fell to the lowest level since World War II. Let me repeat that: the Bush economic program created the lowest unemployment level ever. In fact, economists liken it to full employment given the demographic composition of those who were left on the unemployment line.

This lie was so important a lie that Mr. Erickson had to repeat it to his readership.  Either Mr. Erickson can’t remember back to just the late 1990s, or someone at the Bureau of Labor Statistics should lose their job.  (As an aside, I’m not sure what to make of Mr. Erickson’s claim that “ever” and “since World War II” are apparently interchangeable.  But I digress.)

Then I learned from Ezra Klein’s interview of Representative Paul Ryan what he would do to get the economy moving again:  Raise interest rates!

I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.

It’s unsurprising that Paul Krugman was having none of it:

I don’t even know where to start with this. What does Ryan think the fed funds rate is? (It’s the rate at which banks lend each other money overnight, usually to help meet reserve requirements.) He obviously doesn’t know the the Fed funds rate basically equals the return on federal paper, so that raising that rate would make banks more, not less, likely to stay with that federal paper. I’m sure someone will try to come up with a reason why Ryan is being smart here, but the truth is that he’s stone-cold ignorant.

Many people — myself among them — apparently emailed Klein about Ryan’s remark.  To me, there was only one possible explanation:  He misspoke.  Nothing else would make any sense.  So Klein went back to Ryan for clarification and, lo and behold, he did not misspeak.  Higher rates are his story and he’s sticking to it.  I’m somewhat unfamiliar with the economic principles that call for raising rates to stimulate economic activity; I’d learned it the other way around — lower rates to stimulate, raise rates to decelerate.  But I’m nothing if not open-minded.  Klein then appended his interview with Ryan’s clarification.

In defense of his position, Ryan offered the following:

Of course I do not think increasing the federal funds rate is what one does to spur immediate economic growth.

Although that’s essentially what he said.

But I do think we need to understand that the extremely accommodative monetary policy we have had for the past two years is not risk free.

No monetary policy — accommodative, restrictive, or somewhere in between — is ever risk free.  This is gibberish.

Observers like Kansas City Fed President Tom Hoening have made the case for a modest increase in the federal funds rate to send signals of monetary credibility, get back to normalcy and ward off speculative behavior.

Really, Mr. Ryan?  Really?  You’re going to go with Tom Hoenig?  Tom Hoenig, who has been dissenting on FOMC decisions since January (when he became a voter) because he believed that “economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”  Tom Hoenig, who only recently took his 2010 GDP forecast down to a still-absurd 3% (a level for 2010 that I assign about a zero percent probability of achieving).  And by the way, Mr. Ryan, you’d have a tad more credibility with me if you spelled Mr. Hoenig’s name correctly instead of referring to him as “Hoening” not once, but twice.  (Apologies to Mr. Ryan in the event that was Mr. Klein’s error, but I suspect the exchange took place by email.)

As Krugman appended his piece after Klein appended his:

And sure enough, Ryan tries to cover himself; see the addendum at the end of Ezra’s interview. But he’s faking it: there’s no way to go from what he now claims he was saying to the words he actually said. So he’s both ignorant and dishonest, which we already knew from the way he tried to deny that privatizing Social Security was actually, um, privatizing Social Security.

And here’s the scary part (as if what’s above isn’t scary enough):  Klein describes Ryan as “…one of the party’s most influential voices on the economy. … soon to be one of the nation’s most influential voices on economic policy.”

Be afraid.  Be very afraid.

Adding:  Mr. Klein verified that Mr. Ryan’s clarification (such as it was) came via email, thereby confirming it was Mr. Ryan, not Mr. Klein, who was ignorant of how to spell Mr. Hoenig’s name.

Here is the follow up to Climate Change: The Scientific Debate:

4. Climate Change — Gore vs. Durkin

This video, the fourth in my Climate Change series, looks at urban myths spawned by two iconic films — An Inconvenient Truth and The Great Global Warming Swindle. Whatever you “believe” about climate change, there is no excuse for the kind of exaggerations, fallacies and fabrications we see in films like these. My aim is to cut through the junk science designed to evangelize this issue, and show what the actual scientific research shows us.

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(The video cuts short at the end, and the final sentence should read: “As I look at more of the urban myths they’ve spawned.”)
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5. Climate Change — isn’t it natural?

More urban myths about climate change are busted as I look at the Earth’s climate over the last 500 million years. What causes it to change? Since carbon dioxide was much higher in the past, why do climatologists say higher CO2 now poses a problem? And of course there’s the familiar myth that CO2 can’t influence temperatures because the climate was much colder in the past when carbon dioxide levels were much higher.

REFERENCES

“CO2-forced climate thresholds during the Phanerozoic” — D.L. Royer, Geochimica et Cosmochimica Acta, Dec 2006

“Celestial driver of Phanerozoic climate?” — N. Shaviv and J. Veizer, GSA Today, 2003

“Bathymetric and isotopic evidence for a short-lived late Ordovician glaciation in a greenhouse period” — Brenchley et al, Geology; April 1994

“Reconciling Late Ordovician (440 Ma) glaciation with very
high (14X) CO2 levels” — CROWLEY T. J. ; BAUM S. K., Journal of Geophysical Research 1995

“An atmospheric pCO2 threshold for glaciation in the Late Ordovician”
– M. T. Gibbs et. al, Geology; May 1997

“A weathering hypothesis for glaciation at high atmospheric
pCO2 during the Late Ordovician.” — L.R. Kump et al, Palaeoclimatology alaeogeography
Palaeoecology 1999

“Long-lived glaciation in the Late Ordovician? Isotopic and se-
quence-stratigraphic evidence from western Laurentia” — M. R. Saltzman,S. A. Young, Geology; February 2005

“Solar Activity Over the Last 1150 Years: Does it Correlate with Climate?” — I. Usoskin et.al, Proceedings of The 13th Cool Stars Workshop, 2004

If you have a problem with any of the research that has been done into climate change, please do not waste your time discussing it on YouTube. Write a paper and have it published in a respected, peer-reviewed journal. And no use complaining to me if you think you have found flaws in the work of a particular researcher, write to them and let them know. They will be absolutely delighted to hear from you.

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6. Climate Change — Those hacked e-mails

Now that the conspiracy theorists have blown off steam, it’s time for a more sober analysis of those e-mails and what they mean. I can’t go through all of them, there are far too many, and . So I’ve taken the two that seem to be getting conspiracy theorists most worked up — Phil Jones’s e-mail about “Mike’s Nature trick” and Kevin Trenberth’s e-mail about a “travesty.” I’m glad to see that skeptic websites that cover the science understand what these e-mails actually mean. As you’ll see, very few commentators who jumped on the conspiracy bandwagon even before reading the e-mails managed to get it right.

The Trenberth paper can be found at http://www.cpc.ncep.noaa.gov/products…

Coming soon: Parts 7, 8, 8a

Quite fascinating:

“Over the past couple years, millions of Americans have reneged on their debts — because they lost their jobs, because they took on more than they could handle, or both. For many, those defaults have brought immediate financial relief, leaving more cash to spend on other things. Now, though, they’ll also have to face the challenge of living with bad credit.

As of April, 25% of Americans had fallen into the least-creditworthy category, garnering a rating of less than 600 from FICO, the main arbiter of consumer credit in the U.S. That compares to only 15% before the recession, according to data compiled by Deutsche Bank.”

Why does this matter? Now that NINJA loans are verbotten, this pretty much means that “one in four Americans won’t be able to borrow money to make a major purchase in the foreseeable future.”

Before the recession, the number of people with a FICO score of less than 600 was under 15%.

Some people will lament this, but it has a silver lining. Deleveraging is certainly a good thing, and forcing consumers off of the credit treadmill may actually help these folks over the long haul. The repercussions of the credit weakening means softer growth as the broader economy moves to a more sustainable basis of spending.

Some people complain that unemployment insurance makes people lazy; I disagree — at least so long as their are 5 or 6 unemployed people for each job opening.

But I am going to posture that easy credit allowed some people borrow to maintain a lifestyle, rather than earning to maintain a lifestyle.

I wonder: Will the lack of credit spark a revival of creativity and industriousness amongst those that want to maintain their spending habits? Asked another way, could bad credit spark more economic activity?

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Source:
Number of the Week: Default Repercussions
Mark Whitehouse
Real Time Economics, JULY 31, 2010
http://blogs.wsj.com/economics/2010/07/31/number-of-the-week-default-repercussions/

I had an interesting discussion with a music buddy about some of the least popular, best discs of the past few decades.

The challenge: Name 5 outstanding Rock and Roll albums that 90% of the music buying/downloading public are unfamiliar with.

3 rules:

1. Rock and Roll (including Pop)!  No jazz, classical or world music

2. Obscure: Not a big seller, relatively unknown, not a top 40 song or a top 100 Album;

3. Outstanding album: The disc must be great, listenable from start to finish, cohesive, with one good song after another and a handful of great ones.

Defining what obscure is was also a challenge — a popular UK album unknown in the US counts, but vice-versa didn’t.

We set an arbitrary cut off date of 25 years — there is simply too many great albums from the 1960s and 70s, and those unknowns are more a function of age than obscurity (UPDATE: The older mega-hits “discovered” in comments confirms this). Anything released after 1985 is fair game. And we went with Rock, because there are simply too many obscure Jazz recordings out there.

Cutting it down to just 5 was difficult, but gave the exercise some focus. I will publish my list next Friday.

What are your 5 favorite unknown CDs?

Nice interactive graphic from the FT on reforming the financial system

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The financial centers covered in the graphic are: US, European Union, UK, Germany, Singapore, Hong Kong, Japan.

Goldman Sachs addresses the systematic problem within its culture by announcing a zero-tolerance policy for profanity in employee e-mails.

Thursday July 29, 2010

I honestly have no idea what this means, but jeez, how is this for some cliff diving:

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Chart via St. Louis Fed

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This is what the BOG reports on the G.19. The footnotes on g.19 state the following:

-Outstanding balances of pools upon which securities have been issued; these balances are no longer carried on the balance sheets of the loan originators.

-The shift of consumer credit from pools of securitized assets to other categories is largely due to financial institutions’ implementation of the FAS 166/167 accounting rules.

The final July UoM confidence # was slightly better than expected at 67.8 vs the forecast of 67 and is up from the preliminary reading of 66.5 out a few weeks ago but still remains well below the 76 level in June. Economic conditions were down almost 10 pts from June and the Outlook is down 7.5 pts. One year inflation expectations fell to 2.7%, the lowest since March. Stocks are rallying well off their lows after both July data points coming in above expectations but also as I mentioned earlier, Q2 NOMINAL GDP was above forecasts and while it was heavy on government help and light on consumer spending, it wasn’t as alarming as the market made it out to seem initially. Of course 2011 is a different story when a lot of the government stimulus flames out and, with tax policy may reverse some.

Over the past few years, I have increasingly taken to referring us humans as “Slightly smarter, pants wearing primates.” (here, here and here). When I discussed it in an Forbes interview (Ritholtz’s Monkey Theory)  it generated a ton of email:

What is the greatest financial lesson you’ve ever learned?

You’re a monkey. It all comes down to that. You are a slightly clever, pants-wearing primate. If you forget that you’re nothing more than a monkey who has been fashioned by eons on the plains, being chased by tigers, you shouldn’t invest. You have to be aware of how your own psychology effects what you do. This is why we as investors sell at the bottom, get panicked. All the other lessons I’ve learned have come out of that. As has the field of behavioral economics.

Wall Street clichés, like “cut your losses and let your winners run” come back to prevent the monkey part of your brain from doing what it does. There’s a banana–I want it. That’s how chimps behave. Us humans react to greed and fear in predictable ways. We are predictably irrational. If you understand that you can take steps to prevent that–we don’t own anything in the office that doesn’t have a stop-loss on it. In 2008, we watched the market go down 40%. We figured out we’re chimps, and don’t let the chimp inside us make those chimp-like decisions.

Every good financial decision I’ve made comes from, “Wait a second, monkey boy, step back, don’t do that.” Once you realize how your own brain chemistry works against you, it gives you a chance to not panic at the bottom.

It was (mostly) a glib comment to show how irrational and biased us monkeys can be. (I even made reference to it in Bailout Nation.)

It turns out that joke was closer to the truth than anyone believed. Laurie Santos gives a talk at TED that looks at how shockingly similar our biases are to those of monkeys when it comes to hardwired foolishness.

The good news, for investors as well as monkeys, is that recognizing our limitations — acknowledging, learning the details of, and contextualizing them — allows us to rise above them . . .

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Previously:
Festival of Links (May 21st, 2006)

How Rational Are Markets? (January 16th, 2008)

How Overrated is Sentiment in Economics? (November 22nd, 2009)

Sources:
Ritholtz’s Monkey Theory
David Serchuk
Forbes 03.13.09
http://www.forbes.com/2009/03/12/barry-ritholtz-interview-intelligent-investing-ritholtz.html

Laurie Santos: A monkey economy as irrational as ours
TED, July 2010
http://www.ted.com/talks/laurie_santos.html