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

David Leonhardt has a monster column in the NYT Magazine section on China’s burgeoning consumer society:

“To continue growing rapidly, China needs to make the next transition, from sweatshop economy to innovation economy. This transition is the one that has often proved difficult elsewhere. Once a country has turned itself into an export factory, it cannot keep growing by repeating the exercise. It can’t move a worker from an inefficient farm to a modern factory more than once. It cannot even retain its industrial might forever. As a country industrializes, workers will demand their share of the bounty, as has started happening in China, and some factories will start moving to poorer countries. Eventually, a rising economy needs to take two crucial steps: manufacture goods that aren’t just cheaper than the competition, but better; and create a thriving domestic market, so that its own consumers can pick up the slack when exports inevitably slow. These steps go hand in hand. Big consumer markets become laboratories where companies know that innovations will be tested and the successful ones richly rewarded. Those products can then expand into countries with less mature consumer markets. Look at the telephone, the personal computer and the iPhone and iPad, all of which were designed in the United States and are now sold around the world.”

I can tell this will be my plane reading from Chicago to NY.

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Source:
In China, Cultivating the Urge to Splurge
David Leonhardt
Published: November 24, 2010
http://www.nytimes.com/2010/11/28/magazine/28China-t.html

Fun with Science:

Jem Stansfield travels to the Solar Furnace Research Facility in Southern France. He witnesses the incredible power generated by highly concentrated sunlight.

http://www.bbc.co.uk/bang

The foreclosure mess has now entered a new phase, courtesy of the US Bankruptcy courts. The Trustees are forcing institutions to prove “they even have the right to foreclose at all.”

This is a positive development.

In my various writings on the Fraudclosure debacle, I have not suggested we want to see foreclosures of defaulted mortgagees stopped. To the contrary, Foreclosures (done right) are a necessary part of the RE unwind. My position has been very simple; Banks must follow the law, respect property rights and due process. Oh, and not commit perjury or fraud, and if they did, they must suffer criminal prosecution like any other suspected felon.

Here’s Gretchen Morgenson on the latest twist in this pathetic sage:

“The United States Trustee Program, the unit of the Justice Department charged with overseeing the integrity of the nation’s bankruptcy courts, is taking a different view. The unit is stepping up its scrutiny of the veracity of banks’ claims against borrowers, and its approach is evident in two cases in federal bankruptcy court in Atlanta.

In both cases, Donald F. Walton, the United States trustee for the region, has intervened, filing motions contending that the banks trying to foreclose have not shown they have the right to do so.

The matters involve borrowers operating under Chapter 13 bankruptcy plans overseen by the court in the Northern District of Georgia. In both cases, the banks have filed motions with the bankruptcy court to remove the automatic foreclosure stay that results when a court confirms a debtor’s Chapter 13 repayment plan. If the stay is removed, the banks can foreclose.”

This is progress.

Now if we only can get some criminal indictments for the robo-signer/fraud/perjury lawyers, bankers, and loan servicers, we will be making progress.

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Source:
Don’t Just Tell Us. Show Us That You Can Foreclose.
GRETCHEN MORGENSON
NYT, November 27, 2010  
http://www.nytimes.com/2010/11/28/business/28gret.html

Recessions are on the Margin
November 26, 2010
By John Mauldin

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Recessions Are on the Margin
A Rose is Still a Rose
If It Feels Like a Recession
The Rough Road Back
Mexico, New York, and The Endgame

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I’ve got to admit it’s getting better
A little better all the time
I have to admit it’s getting better
It’s getting better since you’ve been mine
Getting so much better all the time

- John Lennon / Paul McCartney, Sgt. Pepper’s Lonely Hearts Club Band

And the data out over the last few weeks tells us it is getting better. Does this take us out of the double-dip woods, even as the Fed is lowering its forecast? And what is a recession? Yes, we all know it’s when the economy doesn’t grow, but we are in a rather unique economic environment, this time. Maybe things are getting better, but is it enough to get us back on the road to full employment?

Let’s start off with what is going right. We had a slate of news over the past few weeks that was good. The ECRI weekly Leading Index, after some ugly downtrends, is showing signs of turning around. We have had small increases each week since October 15, and the annualized growth rate of the index is now only -3.1%, having increased for 12 weeks. Its recent low was in July. Yes, I know that a large part of that growth is in the financial sector, as the stock market is up and interest rates are low, but it does suggest that 2011 should not be a recession year.

The Federal Reserve Bank of Chicago’s National Activity Index improved in September and is now only slightly negative, again suggesting that there should be no recession in ’11. The Richmond Fed Manufacturing Survey was up this last week, as well, to its highest level since August. And the Kansas City Fed survey was up for the third month in a row.

Moody’s World Business Confidence Survey is up slightly. “Business sentiment has taken on a slightly better hue in late November. Although overall confidence has remained largely unchanged since early July, responses in regard to current business conditions, sales strength, and investment in equipment and software have improved in recent weeks. The survey results suggest that global growth may be gaining some traction at year’s end after a lull this summer and fall. It is also encouraging that hiring intentions remain firm, and while pricing is soft, there is no indication that deflation is a serious problem. Nonetheless, businesses do not anticipate a significant acceleration in activity anytime soon, as expectations regarding the outlook into mid-next year have shown no meaningful improvement.” (www.dismal.com)

Third-quarter GDP was revised up to 2.5%, although inventories accounted for just over half of the growth. Building inventories counts as a plus in GDP accounting, and selling them deducts from GDP growth. Just the way it’s done. But at some point inventories will stabilize. That headline number will be harder to get up over 3% when that happens. (I decided to go back and look at the BEA historical inventory numbers. Interestingly, there seems to be a bug in that particular data and it shows up as -9999 in both online and printed formats. All the other data was fine. Someone should fix that. After 20 minutes of trying to find it elsewhere, I decided I needed to get on with writing.)

Initial jobless claims dropped to a seasonally adjusted 407,000 this week, a rather amazing number, as the actual number was 462,000 (although the week before the actual number was just 409,000). That is why most people pay attention to the seasonally adjusted number, as this data series is extremely noisy. Let us hope this is a trend.

And what’s this? Personal income was actually up 0.5% for the month? That’s positive, as personal income growth has not been all that good, and is now up 4.1% over the last year. Just six months ago, in May, it was up only 1.8% over the preceding year.

Mortgage applications were up, although new-home sales dropped a rather dismal 8.1%. New-home sales are close to the 47-year record low set last August, and down 29% from a year ago. The median sales price is down 9% from a year ago. The good news in all this is that as prices drop and foreclosures keep on coming, homes will become more affordable to people who want to buy. The cure for low prices is low prices. While it may be well into 2012 before we work through the excess inventory and the aftermath of the housing bubble, as I wrote here in 2008 (I was told I was such a doom and gloomer!), we are closer to that point than we were a year ago. These things work themselves out over time.

The economy has now grown at a rate of 3.1% over the last four quarters. That is the good news and it’sthe best growth we have had for four quarters since 2005. We have been slowing down somewhat the last two quarters, but are still north of 2%. With inventory growth slowing, it is really possible to be below 2% for the 4th quarter.

A Rose is Still a Rose

There is a theme to a lot of the positive news we’ve been getting lately: it is positive, but not by much. Normally at this time in a recovery we would be seeing 4-5% (or more!) GDP growth and some real recovery in employment.

Still, 2% is not a recession. And given what we have seen, there should now not be a recession in 2011, barring some “exogenous” shock. Something that is from outside the normal system. I have written for a long time that the one thing I really am concerned about is that the Bush tax cuts will not be kept. If the Bush tax cuts on the middle class are not kept, it seems a lock to me that we’ll be in recession rather soon in 2011.

At 2% growth, the economy MAY be able to handle it if we only end up taking away the tax cuts for those with over $250,000 in income. It will slow things down, but probably not enough to cause a recession, if we are growing at 2.5%.

I know a lot of my readers think it is just me being political, but that is what the research and the data tells us. Maybe if I called them the 2001-03 tax cuts and didn’t use the name Bush it would be less offensive to some. I really get that. But the research is the same no matter what name I use. A rose is still a rose.

Take capital gain taxes. An increase in capital gains taxes has never – NEVER – increased tax collections as much as forecast. And a decrease in capital gains taxes has always – ALWAYS – produced more tax revenue than forecast, and often more in taxes than was being collected before the tax cut. People change their behavior over what seem like small changes in capital gains taxes. The data and history are clear.

Right now the people who seem to know think those tax cuts will get extended. If they do, is there anything else that could shock the system? The first thing that leaps to my mind is a real credit and banking crisis in Europe. European banks are in bad shape and own a massive amount of government debt in Greece, Ireland, Spain, and Portugal. Truly massive.

This is a graph of the exposure of French, German and UK banks to Spain, Portugal, Ireland, and Greece. For those who are seeing this in black and white, the top part of each bar is Spain, and going down to Greece. Any wonder why the markets get nervous when Germany starts talking about the need for bond holders to take a haircut in any debt restructuring?

We will take a look at Europe next week. But as I have written on numerous occasions, and as should be very clear by now, the international credit and banking systems are very connected. While US banks are not overly exposed to European sovereign debt, we are exposed to their banks. We just simply do not know what the ramifications of a credit crisis will be here. But it bears watching.

If It Feels Like a Recession

The old joke is that a recession is when your neighbor loses their job and a depression is when you lose yours. As noted above, the economy is growing, so why does it feel like a recession? Maybe because the data is still in recession territory. Let’s look at a few items.

Capacity utilization is well off its lows but is in territory normally thought of as a recession. Look at the latest data from the St. Louis Fed FRED research database (a treasure trove of all sorts of data; love this site!). 75% capacity utilization has only been seen in past recessions, and indeed in many recessions never got this low!

We all know unemployment is high, but it bears looking at how high, to get an historical perspective. Only once has it been this high. Notice that it took almost 8 years in the ’80s, with a powerhouse economy, for the unemployment rate to drop 6.5%, and in the ’90s it took 9 years to drop 3.5%. It only dropped by about 2% over five years in the middle of the last decade. We are now at an effective 10%. Nine years to get back to 6.5%? Five years to get back to 8%?

Read the rest of this entry »

We were waiting for the end of the world,
waiting for the end of the world,
waiting for the end of the world.
Dear Lord I sincerely hope you’re coming
’cause you really started something.

-Elvis Costello, Waiting For The End Of The World

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In today’s LA Times, Tom Petruno looks at the Zombie Bears: Still betting on economic doomsday — and still waiting. (I have a few choice words in it).

Despite the U.S. economy growing (5 Qs in a row), improving data, and a stock market making two-year highs, to some people, things are still bad and getting worse:

“On the Internet, there is an army of people who will immediately and bitterly dispute anything they read suggesting that 1) the U.S. recovery is real or 2) the global financial system has any hope of avoiding another meltdown.

Barry Ritholtz, head of investment research firm Fusion IQ in New York, calls these folks the “zombie bears.”

“They will not admit the economy is getting better, albeit slowly,” Ritholtz wrote this week on his widely read economics and markets blog, The Big Picture. “They insist the recession was a depression; they insist it never ended. These are the bears who cannot be killed. They will stay bearish, regardless of the data that all but insists otherwise.”

That ought to sting coming from Ritholtz because he was a hero to the bear camp heading into the 2008 financial and economic crash. He had predicted a severe comeuppance after the nation’s long debt binge, and we got it.

But by the time the stock market hit its low point in March 2009, “We already had a massive crisis and collapse, so the worst of what came before was already reflected in equity prices and trader psychology,” Ritholtz said. It was time to reassess.

By refusing to believe that a recovery would follow, the zombie bears have sat out a 70% rebound in the Dow Jones industrial average from its 2009 low — and far bigger gains in many foreign markets.

I spoke with the reporter about the recency effect, about how people’s views are disproportionately shaped not by long term trends, but by what occurred most recently: “It’s human nature to see our present situation, and the future, through the prism of our recent experiences. After living through what was (or is) for many people the worst economic nightmare of their lives, it’s not surprising that we’re now constantly looking over our shoulders, fearful that another crisis is imminent.”

For those of you who like to delve into the psychology of such things, the full column is worth reading . . .

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Source:
Still betting on economic doomsday — and still waiting
Tom Petruno
LATimes, November 27, 2010
http://www.latimes.com/business/la-fi-petruno-20101127,0,1463640,full.column

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The planet’s population will hit a new milestone son: 7 billion people. But the rate of growth starting to slow.

Check out this fascinating graphic courtesy of The Economist:

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Few people can make words sing as well as Alan Abelson can when he takes quill in hand to wax eloquent on our state of financial being. More poet than economist, his weekly take on Mr. Market’s gyrations is the top of my DO NOT MISS list. Abelson remains the standard against which all other American financial writing is to be judged.

This week’s column is a brief reminder why:

“Epipihanies don’t grow on trees, at least not on buttonwood trees. Which explains, we suppose, why, while mulling the unpredictability of the market from one day to the next, we were totally unprepared for the extraordinary flash of insight when, out of the blue, it struck us: The fault lies not in ourselves but in the quixotic nature of the market gods. Like those worshiped by the ancient Romans, they can be sadistic, mean and cruel to us mere mortals and then, in a wink, turn into kind, compassionate and just plain nice deities.

And so it was last week. On the eve of Thanksgiving (no accident that), they discarded their loathsome personas, donned a few days earlier when they gave the markets a ferocious pasting, and conspired to provide balm for the bruised investor. Wise in the ways of everything, they decided that what could most effectively change the investing mood from sad to glad was to whistle up a wall of worry.

The building blocks were all there and any that weren’t could be summoned up with the snap of the fingers. And, by Jove (or whoever the top dude is among the market gods), it worked! The wall magically sprang up—North Korea giving South Korea a taste of the grape, Ireland and its banks in deep doo-doo, and Portugal and Spain getting their tin cups ready, the swelling probe of Wall Street doing evil things, unbelievably bad housing numbers (it makes us grimace even to rattle off all this worrisome stuff)—and triggered a rousing rally.

Frankly, the notion that trouble makes the market go up seems more than a bit off-the-wall, except that the occasional spot of woe purportedly keeps animal spirits in check and cools speculative fever, thus assuring the rally’s durability. Elegant theory, we agree, but far from a sure thing in practice, as 1973-’74, October 1987, the dot.com boom or (it may seem like a distant memory to you) 2008-’09 painfully demonstrated.”

As someone who dabbles in putting thoughts on page, I very much appreciate his ability to convey, in a few short paragraphs, so much so eloquently.

He is the American Shakespeare of economic commentary . . .

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Source:
A Surfeit of Worries
ALAN ABELSON
Barrron’s Up and Down Wall Street, November 27, 2010
http://online.barrons.com/article/SB50001424052970204374404575630772900668734.html

With Apple finally landing the Beatles for the iTunes Music store, I wondered if the competition was going to do anything in response. For example, at the iTunes Music store, the full Beatles Boxed set — obviously misnamed, as it is 1. digital and b) minus the physical materials (which are terrific) — is priced at $149.

What is the price of this elsewhere? Its $189.10 at Best Buy, its $169.99 at Walmart and Barnes & Noble  $199.99.

Jeff Bezos has fired a shot across Steve Jobs’ bow: Amazon slashed the price of the Beatles Box set — 14 CDs plus a DVD containing a short “making of” each album — from a list price of $259.98 to a sale price of $129.99. The mono version is same price. And, it ships for free.

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Here is what I wrote about the Beatles Box Set in our 2009 Best of Music:

“The sound quality is revelatory. A team of engineers from Abbey Road Studios spent four years using both state of the art technology plus renovated vintage studio equipment to maintain the authenticity and integrity of the original analog recordings. And it shows. The vocals sound like Paul and John are singing from the middle of your living room. The guitar three-dimensional, with resonance of buzz and acoustics of a real guitar. The songs come alive, full of small details not heard before. It sent me off to buy a new pair of front speakers.”

As sound quality gets worse as files get compressed ever more small in the age of the iPod, this is a delightful throwback. A memorable sonic experience.”>

I have no idea how long Amazon will be running this special. If you are even thining aobut getting this for yourself, snap it up now. If you are close to any Beatles fans who don’t own the set, now you know what you are getting them for the holidays . . .

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Previously:
Amazon’s Price War

A Different Kind of Top 10 Music List for 2009

I mentioned earlier that the I am avoiding the maddening crush of the crowds today, but I keep finding attractive deals online.

I have not gotten into Mad Men yet, but enough people whose taste’s I respect have highly recommended it. Amazon has Seasons 1-3 in either BluRay or DVD at $9.99. (D0wn from $49/$39 per season).

I just ordered all three seasons . . .

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Mad Men: Season One

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Mad Men: Season Two

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Mad Men: Season Three

Quote of the Day:

“If I get even a whiff of an investigation, I want to get out before the next guy, especially if I know they have illiquid stuff or I don’t know what they have. Everyone’s nightmare is to get stuck with the stuff in the basement.”

-Head of a fund of funds, speaking to the FT.com anonymously.

This SEC investigation promises to be quite interesting . . .

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See also:
SEC switches to undercover tactics (FT.com)