Posts filed under “Think Tank”

Jim Welsh Investment Letter – May 22, 2009


Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, “The Financial Commentator”, since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets.


Investment letter – May 22, 2009


As noted in the March and April letters, there is a good chance that GDP will post a positive print in the fourth quarter of this year, and maybe in the third quarter. However, the most important issue in the next 12 to 15 months is whether the rebound in the second half of 2009 and first half of 2010 will gain enough traction to launch a self sustaining economic recovery. The short answer is no one knows. What we do know is that the drag to GDP from housing, inventories, and exports will be less in coming quarters. And, with the push coming from the stimulus plan, there will be a positive GDP print in the fourth quarter, if not the third quarter. Although most of the ‘growth’ will be statistical nonsense (less bad confused as actual growth), most economists will be satisfied since they assume that an increase in GDP automatically means a lasting recovery will follow. This view overlooks the many cyclical and secular hurdles that collectively threaten to transform the U.S. economy in coming years.

A dissection of the -6.1% decline in first quarter GDP will underscore why a turnaround in GDP is coming. The decline in residential construction subtracted -1.36% from GDP. However, single family housing starts have held steady for the last 4 months through April. (Apartment construction was very weak in April -42.2%, but that has more to do with commercial real estate than residential.) With housing starts already down 80% from their peak three years ago, there is a good chance starts will continue to stabilize near 350,000, a very depressed level. By the time the fourth quarter arrives, the drag to GDP from residential construction could be near zero, and possibly a slight positive. Businesses slashed inventories a record $103.7 billion in the first quarter, which shaved -2.79% from GDP. Last week, 52 million Social Security recipients began receiving their $250 economic recovery checks. Along with other measures within the $787 billion fiscal stimulus plan, consumers will have more disposable income, which will lift demand in coming months. This will help align sales with production and inventories, so the large drag from inventories will be far less in the second half of 2009.

In the first quarter, exports dived 30%, the largest drop since 1969, while imports plunged 34.1%, the steepest fall since 1975. The decline in exports knocked -4.06% off of GDP. But, in the quirky world of gross domestic product, the larger drop in imports added +6.05% to first quarter GDP, since imports represent production outside the U.S. If the impact of exports and imports were excluded, GDP would have fallen -8.1%, rather than -6.1%. Fiscal stimulus in the U.S. should revive demand for goods and services, including imports. The net result of improving exports and imports could be close to a push.
Business investment on new buildings and equipment plunged 38%, the most since 1947. This accounted for the bulk of the -4.68% non-residential investment subtracted from first quarter GDP. Although commercial real estate will remain weak in coming quarters, business investment has begun to stabilize. In the first quarter, Cisco’s revenue was down 17%, while Intel’s was off 28%. These are staggering declines, but both companies reported that the tech spending environment has stopped getting worse. Even if business investment doesn’t pick up by the fourth quarter, the negative drag on GDP will be less.

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Category: Think Tank

Baby We Were Born to Run

“In the day we sweat it out in the streets of a runaway American dream, at night we ride thru mansions of glory in suicide machines, sprung from cages out on highway 9, chrome wheeled, fuel injected and steppin out over the line.” Sorry but knowing that each and every one of us own a…Read More

Category: MacroNotes

We’re All “Dogs of the Dow” Investors Now

Good Evening: Grappling with an already confusing investment climate, investors were treated today to a GM bankruptcy filing and a scorching stock market rally. To the list of firsts previously set during the 2007-2009 bear stock market, we can now add the Chapter 11 filing of a current Dow component, the steepest 2-10 year yield…Read More

Category: Markets, Think Tank

Federal Agencies Propose Rule to Implement S.A.F.E. Act Mortgage Loan Originator Registration Requirements The Federal financial institution regulatory agencies are together issuing for public comment proposed rules requiring mortgage loan originators who are employees of agency-regulated institutions to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E….Read More

Category: Credit, Federal Reserve, Think Tank

Inflation, growth and stock market performance

Continuing my point last week on REAL vs NOMINAL returns in stocks, the happy, go lucky days of the 2nd half of the 1990′s was best described with the famous buzzword ‘goldilocks,’ with the connotations of strong growth and low inflation with the Maestro running the show. The combination allowed P/E multiplies to rise at…Read More

Category: MacroNotes

C&I loans/decoupling

In the context of the debate of whether banks are lending or not to businesses and/or is the demand for loans still falling, Friday’s data from the Fed for the week ended May 20th has commercial and industrial loans falling to the lowest level since June ’08 and is down for 9 of the past…Read More

Category: MacroNotes

Income and Spending

April Personal Income rose .5%, much better than expectations of a drop of .2% while Spending fell .1%, .1% better than forecasts. The revisions to March were modest. The factor in the surprise gain in income was related to the Government’s stimulus plan where transfer payments rose smartly and there was also reduced personal current…Read More

Category: MacroNotes

The Briefing (bad fiction)

Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.


May 2009

The New Yorker magazine has maintained long preeminence among literate types by wrapping usually good writing in an old-world sensibility. While one may agree or disagree with its varying points of view, there is no doubt that the cascade of usually well-chosen words merely seek to rise to the level of profundity its cartoons seem to express so easily.

We found the one below while visiting the “ON THE MONEY” exhibit at the Morgan Library and Museum (January 23 to May 24). It was drawn by Joe Mirachi and published in March 1980 during a period of massive price inflation and rising interest rates (brought about by years of massive government produced monetary inflation). Mr. Mirachi’s barflies knew that such highfalutin terms were only fancy expressions for dollar devaluation. “TO THE DOLLAR – AS WE KNEW IT!” Indeed.


Or consider Lee Lorenz’s depiction of the dubious nature of government statistics (on the following page). This cartoon appeared in the New Yorker in March 1976, almost two decades before the Bureau of Labor Statistics began playing with the consumer price index by subjectively substituting, re-weighting and placing a hedonic value on consumer goods and services. As the cartoon’s subjects imply, (and as our essay last month proclaimed), some things never change.

We were so inspired by the unthreatening manner in which these gadflies are able to expose economic elephants in the room that we felt obliged to give it a shot. Alas, our crayons failed us. Lacking the necessary talent (and imagination) to even attempt the creation of poignant cartoons, we instead sought to assassinate the high art of literary fiction. Mr. Updike, we are sorry you’re gone but happy you won’t see this:

The Briefing
bad fiction

The narrow hallway had been going on endlessly, curving gradually down and to the left like a giant underground corkscrew or one of those ramps we drive around in parking garages. At last we were coming to a door, another 100 yards or so down. My mysterious escorts and I had been walking at a pretty good clip for a long time, descending deeper and deeper. We hadn’t passed any doors since we entered the hallway and it occurred to me that the entire tunnel’s function was to arrive at the one we were now approaching. We must be, what, 100 feet below the basement of the White House by now?

The only sounds over the last ten minutes were our footsteps and the occasional soft sound of fresh air flowing through small vents in the floor. I had grown accustomed to mysterious people walking behind me, usually in some sort of security detail. But these were older, patrician men dressed in classic business suits and without the tell-tale earpieces of security guards. They had appeared in the room off the White House kitchen suddenly and, it seemed, from nowhere. Each gave me only a faint acknowledgment of my presence, which was unusual, though I must admit refreshing. These four men were the only ones with me. Even Johnny, my newly assigned “body man” was given the morning off until I went back to the transition team’s hotel.

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Category: Think Tank

China is still the boss

China is once again proving that it’s the most important country in the world right now both in terms of its own growth as the 3rd biggest economy in the world and also its impact on commodity prices and the subsequent benefit that it gives to a variety of emerging markets that produce them. Both…Read More

Category: MacroNotes

The King Report: SPX Manipulation ?

> > Trading sources allege that JP Morgan bought 2500 SPMs near the close on Friday. >

Category: Legal, Think Tank, Trading