Posts filed under “Think Tank”
Vice Chairman Donald L. Kohn
At the National Association for Business Economics, St. Louis, Missouri
October 13, 2009
The Economic Outlook
I’m pleased to be here at the National Association for Business Economics. Most of you are in the business of making or using economic forecasts to inform the strategies of your organizations as they try to meet their objectives. So am I, and I thought this would be a good opportunity to discuss my view of the outlook and the implications that I draw for monetary policy. I’ll start with a brief overview of recent developments and the near-term outlook. Then I’ll turn to a few of the issues that bear on the medium to longer-run outlook. I emphasize that the views you are about to hear are my own and not necessarily those of my colleagues on the Federal Open Market Committee.1
In broad terms, the data that we have in hand indicate that economic activity turned up in the third quarter. To some extent, the pickup in activity in recent months reflects the dissipation of some of the forces that had been exerting downward pressure on the economy during the preceding several quarters. Perhaps the most important of these downward forces was the turmoil in financial markets that began in late 2007, which not only tightened credit availability and reduced wealth, but also undermined confidence, especially when conditions took a decided turn for the worse in the fall of 2008. The stabilization, and more recently the improvement, in risk appetites and financial conditions, in part responding to actions by the Federal Reserve and other authorities, has been a critical factor in allowing the economy to begin to move higher after a very deep recession.
A turn in the inventory cycle is another key element in the recent firming in aggregate activity. During the second half of 2008, many firms were apparently surprised at the sharp falloff in demand. In response to a buildup of unwanted inventories, they began aggressively liquidating stocks by slashing production well below the level of sales. The pace of liquidation intensified through the middle of this year. More recently, however, with inventories now less burdensome, firms have begun boosting production to slow the pace of inventory destocking and bring output into closer alignment with expected final sales. This process is particularly evident in the motor vehicle industry, where the stock of cars and trucks on dealers’ lots had become extremely lean, prompting increases in assemblies from the very low levels seen at midyear. More broadly, the slower pace of inventory liquidation likely provided an appreciable boost to manufacturing production in July and August, and should continue to push up factory output further in the near-term.
The Fed’s Vice Chairman Kohn speaking on the economic outlook is not saying anything new. He discusses the signs of improvement that will lead to growth in Q3, “dissipation of some of the forces that had been exerting downward pressure on the economy during the preceding several quarters,” inventories, stabilized housing, business spending on equipment…Read More
October 9, 2009 A client asked the following question above …. Jim, yes, same page, “inflection” point = March rally over. I missed the conf call so you may have touched upon it. Will have time to review this weekend. I think you believe rally is over when Fed “pulls” liquidity, i.e, rate high, etc….Read More
Category: Think Tank
Former Morgan Stanley Analyst Andy Xie explains why China is a potential bubble: ~~~ Asset bubbles come and go. Each begins with a story: Japan as No. 1, the East Asian miracle, dotcom mania, how financial innovations eliminate risk – just to mention the latest four. Each begins with a plausibly bullish story, which is…Read More
Category: Think Tank
Another day, another 14 month low in the $ index and record high in gold. This comes even after the Oct German ZEW investor confidence figure in their economy was almost 3 points less than expected and unexpectedly fell from Sept, below forecasted inflation data in France and the UK and a comment from an…Read More
Good Evening: The major U.S. stock market averages rose for a sixth straight day today, and the S&P 500 set a new closing high for 2009 in the process. I will first breeze through today’s events before examining what I think could be a fascinating earnings season. Since there are important similarities and differences between…Read More
I look forward at the beginning of every quarter to receiving the Quarterly Outlook from Hoisington Investment Management. They have been prominent proponents of the view that deflation is the problem, stemming from a variety of factors, and write about their views in a very clear and concise manner. This quarter’s letter is no exception, where they once again delve into the history books to bring up fresh and relevant lessons for today. This is a must read piece.
Hoisington Investment Management Company (www.hoisingtonmgt.com) is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $4-billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies. And now let’s jump right in to the essay.
John Mauldin, Editor
Outside the Box
The Federal Reserve reported that as of June 30, 2009 total U.S. debt was $52.8 trillion. Total U.S. debt includes government, corporate and consumer debt. Importantly, however, it does not include a few trillion in “off balance sheet” financing, contingent unfunded pension plans for corporate and state and local governments, or unfunded liabilities of the U.S. government for such items as Medicare, Social Security and other programs. Currently GDP stands at $14.2 trillion, so there is approximately $3.73 in debt for every dollar of output in the United States, a level unprecedented in our history (Chart 1). Normally, debt levels as a percent of GDP would be uninteresting and immaterial; however, the current level of debt is unique in two ways. First, the asset side of the balance sheet purchased by the debt is falling in price. Second, the money that was borrowed to purchase those assets was often fraudulently expended. Neither the borrower nor the lender really expected the debt to be serviced. Rather, each party expected the asset price to rise extinguishing the debt.
This type of financial arrangement was correctly analyzed by the famous American economist Hyman Minsky in his paper, “Financial Instability Hypothesis”, in which he described three phases of debt financing. The first is “hedge finance”, where the lender expects a return on both principal and interest. The second is “speculative finance” where the lender expects to get interest on the loan but perhaps not the principal. The third case, where the lender expects neither the principal nor interest to be returned, is referred to as “ponzi finance”. This was typified in the last business cycle by loans issued without documentation, no down payment home loans, extremely low cap rates on commercial real estate, and the high leverage borrowing ratio of private equity funds. Even ponzi finance works as long as asset prices are rising. But once the bubble is pricked, the debtor is left with declining asset values that preclude the rollover of their obligations.
Category: Think Tank
While the market has come off its intraday highs, it didn’t take much as volume is running at the slowest pace since Jan 2nd, the Friday after New Years Day. With earnings reports upon us in earnest beginning tomorrow, the stock market becomes a different place in that it more discriminates between those that deliver…Read More
Oh, financials, financials, financials. Here we go again. JPMorgan Chase reports quarterly profits on Wednesday; Citi announces a quarterly loss on Thursday, Bank of America delivers its results (no one knows if loss or profit) on Friday. The parade will continue right through Halloween.
Cumberland does not use single stocks in its US equity account management. So while we are keenly focused on these reports, we’ll review some of the applicable ETFs instead.
Since March 9 the big bank ETF that tracks the KBW Bank Index has delivered a total return of 145%. The three banks reporting this week constitute 25% of the weight of the exchange-traded fund (ETF) that mirrors that index. Its symbol is KBE. These big banks are deemed “too big to fail” and have benefitted greatly by obtaining the federal government’s direct support and guarantees. That subsidy will be revealed in their positive surprises to earnings reports
Contrast KBE with KRE. It is the exchange-traded fund composed of regional banks that have not been deemed “too big to fail” by the Washington-based troika of Treasury, Fed, and White House/Congress. Many regional banks are small enough to be resolved by the FDIC, and many suffer from a greater concentration of deteriorating commercial loans than their larger brethren. Their status is reflected in the performance of their stocks. KRE has had a total return of only 49% since March 9. It has actually lagged the performance of the S&P 500 index, represented by the “Spider.” SPY has had a total return since March 9 of 59%.
Category: Think Tank
In a harbinger of what’s to come in terms of Q3 growth, Singapore is the first nation of significance to report Q3 GDP and it was better than expected. Its GDP grew 14.9% q/o/q annualized, .4% higher than forecasts. Q3 Earnings reports beginning in earnest this week will translate for us what the statistical global…Read More