Aug 16, 2010 Joblessness Does Not A Recovery Make Posted on 8/16/2010 2:14:52 PM
The Administration declared the recession over in July, 2009. It was a good political sound bite, but one that has yet to be confirmed by the National Bureau of Economic Research, the official arbiter of recessions. A bit premature according to the NBER which reports: Last Four Recessions and their Durations
Recessions end with the resumption of economic expansion evidenced with job growth. However, non-farm labor is 52,000 employees lower this July. With businesses and households facing many financial uncertainties, the hoped for expansion will remain anemic. The Economist, using NBER data, has examined the current and the five prior recessions, including the 30s.
Our current trajectory is not pretty. Friday's jobs report provided no encouragement. Accustomed to debt for decades and lacking the equity or incomes to support previous financial assumptions, businesses and households will continue priortizing debt reduction over consumption until incomes improve. Compounding the problem for central planners are the Boomers who have no motivation to resume their prior spending levels since most are now empty nesters and their underfunded retirement is looming. With China surpassing Japan as the world's second largest economy, investment portfolios must increasingly redirect capital outside the USA. The middle class demographic cohorts in China and the emerging markets are neither wealthy enough nor numerically large enough to replace the US consumer. However, not facing the burden of debt present in developed economies, growth opportunities should be easier to find. July 8, 2010 A Family Benefit: An Economic DragPosted on 7/8/2010 7:00:10 PM
For the past three decades we have supported our economy by spending our generally increasing incomes. We accelerated our pleasure, acquisitions and life styles with the use of cheaper and cheaper financing. We lived better. Our kids missed the “sacrifice for the future events,” the economy grew. It was leveraged up with credit cards, consumer and mortgage debt.
In times of uncertainty and with an increasing number of empty nesters, households re-prioritize the allocation of income. The change is not solely a function of the recent financial crisis. The age of life drives the change and is occurring as well in Europe as populations prepare for retirement. In England, the populace is saving more money than it is borrowing for the first time in twenty years.
In addition to actual savings deposits, principal payments on debt are classified as saving. Increasing liquid assets and less debt are good for family security. However, it is money that previously was magnified by credit and is no longer supporting global economies.
With a weak job market, it is no wonder federal data reflects what we have been telling clients to expect for years.
June 30, 2010 Markets Decline: Cash is KingPosted on 6/30/2010 3:44:04 PM
The G-20 meeting ended with a non-binding agreement to resolve the debt issues facing the global economy. Most of Europe wants to avoid becoming another Greece by choosing various degrees of austerity. The US already has a de facto austerity program in place through inaction. Current tax rates expire at the end of this year with very progressive changes that will remove money from households and businesses. That is a built in headwind for the economy to endure. It is not fuel for economic growth. The US argued for global participants to increase consumption. Unfortunately, consumption can be impacted only on the margin by government. Demographics and the population within various stages of life determine consumption and savings. Young adults lack sufficient income to save the economy. Household demand grows as children reach adolescence when neither food nor clothing nor furniture nor cars last long.
Raising adolescents requires money, and that drives household spending. A growing demographic cohort of teenagers is almost 15 years away for the US. We are the lucky ones in the Western world. We have a positive birthrate from which we will get innovation, adaptation and economic growth. This decade will be choppy as it was in the 60s and 70s when Boomers left college to start careers and families.
Unfortunately, governments cannot change demographic cohorts, especially in Europe where births are below replacement rates. Domestically, the spending needs of Boomers are declining in favor of debt reduction and retirement savings. Other than shifting purchases through wealth transfer programs, (Cash for Clunkers; Housing Tax Credit) the impact on growth is net zero, at best. Tax one party to give the money to another party. There is no net growth through creativity or productivity which has been our economic engine for the last quarter century.
Continued uncertainty about global economic scenarios has been reflected in the markets with the worst quarter since March 2009. With Germany, Japan and China initiating budgetary constraint, growth must slow. Austerity does not create growth. Nor is austerity a vote getting program because politicians must be forthcoming about the lack of money to continue the status quo.
(1) The benefits from the current Obama stimulus peaked in the first quarter which means slowing GDP growth.
(2) In 2011, taxes are going up and that will hamper economic growth meaning more slowing of GDP growth. (3) Real estate prices are estimated to decline 20% in the next twelve months likely reducing consumer confidence and slowing consumer spending further. At quarter’s end, the small business jobs report for June was 13,000 new hires instead of the expected 60,000. Friday’s employment report should reflect the loss of 100,000 jobs primarily from the termination of census workers. We expect unemployment to rise, keeping consumer spending at bay.
More optimistically, S&P-500 companies have almost $1 Trillion of reserve cash – equal to the GDP of S. Korea. In the first half of this year, nearly 140 companies initiated or raised dividends with only two decreases unlike last year when 78 companies reduced dividends. Analysts at Standard & Poor’s expect announcements of dividend increases to accelerate and average more than 5% by year’s end.
This will not be headline news. The “doom and gloom” drives headlines. While we watch markets decline, we are entering the area where real risk is low while perceived risk is high. The disparity creates significant opportunity to buy good assets cheaply.
The S&P-500 has declined 7.7% since the beginning of the year and 15.5% from the April peak. Our heavy cash position has protected account balances. Market sectors are changing with the economy. We expect to see some attractive places for investment near term. June 29, 2010 Consumer Doldrums Not OverPosted on 6/29/2010 2:43:13 PM
A variety of concerns drove market prices lower on Tuesday with the Dow closing below 10,000. The S&P-500 closed lower, and from our view, below a significant level of support. European banking concerns and possible contagion are not gone. Also, there is recognition that China is slowing and will not be a replacement for the US as an engine of economic growth. China is a big country but the consumer impact is still much smaller than the wealth available to consumers in our country. Consumer confidence is a critical component of a growing economy. Today’s report of consumer confidence declining by more than 15% in June was the 6th lowest report since 1999 and much lower than anticipated. Confidence is not likely to improve much as long as employment growth is anemic. The survey did not find much optimism among job seekers for prospects of employment.
The impact of federal stimulus programs peaked in the first quarter. The Administration’s efforts for another “jobs bill” have failed. With Senator Byrd’s death, the 60 vote majority is gone. Additional spending will be difficult to obtain as more Democrats respond to constituents concerns over the federal debt and deficit.
Government inflation numbers do not seem worrisome if one is to trust what the government tells us. (Surveys indicate there is not much trust). The pinch for households is going to come from a squeeze caused by flat-lined or falling incomes meeting higher gasoline and health insurance costs in the coming year. It will feel like inflation and further reduce discretionary consumer spending. We have referred readers to www.economicindexes.com to follow the current trend. Government reports have not caught up with real time data.
Real estate remains stagnant in most parts of the country. Modest price rises in California associated with the end of the tax credit program do not make a foundation for future recovery. Early reports for May show significant declines which will adversely impact consumer confidence and spending.
Normally, at quarter’s end, institutional portfolio managers are buyers of major companies so reports look good. That has not been enough to offset greater economic concerns.
What we observe is a market where risk is declining to attractive levels in an environment where opportunity is narrowing into fewer sectors. June 28, 2010 Who Do You Believe?Posted on 6/28/2010 1:10:55 PM
The Department of Commerce reported today higher incomes and spending for the month of May – depending on whose news you read. At AP, the headline was “…consumers spend more.” At Bloomberg.com the headline was “…Probably Little Changed…” Traditionally, increases in income and spending would be cause for celebration reflected in higher stock prices and expectation of increasing corporate profit.
Reality, at times, is a bit harsher. Income data was better due to a slight increase in the number of hours worked. Increases in employment were primarily temporary workers for the census. It is expected that 250,000 of those jobs will end this month. Private sector job growth remains anemic and unlikely to offset losses.
The spending increase was likely driven by higher utility bills as warm weather increased demand for air conditioning. That type of consumer spending does not keep the economy rolling along. It reduces discretionary spending that is the core economic fuel.
Retail sales reports shed a different light. Consumers are not spending on goods. Spending increased after the 81-82 recession at almost three times faster than in the current season. Thirty years ago, we were at the leading edge of raising the Boomers’ teenage children. We are now at the trailing and shrinking edge of that demographic demand.
Household savings increased last month, too. This is expected as people age, have fewer family responsibilities and face retirement and more so in unstable economic times.
Government actions to “stimulate spending” have had minimal impact on private job creation. It is hard to imagine otherwise since the majority of the stimulus money was given to states with budget deficits. With the death this weekend of Senator Byrd, passage of another stimulus bill or extension of unemployment beyond 99 weeks will be difficult.
It is becoming more difficult to “kick the can down the road.” The G-20 meeting generated agreement to agree to a non-binding agreement. Generally, after all attendees were past their next election, austerity measures should be seriously addressed. In the meantime, all seemed reluctant to discard their rose colored glasses of Keynesian stimulus plans.
Categories: none
June 25, 2010 One or Two Scoops?Posted on 6/25/2010 4:43:16 PM
In economic terms, it is “One dip or two?” In the ice cream parlor, two is nice. In the global world of economies and markets, not so much!
In the monopoly game of currencies, it is either “trust” or “make believe.” China loudly restated the rules this week for all to hear by “agreeing” to float their currency. China owns Boardwalk, Park Place, the railroads and, lest we forget, they are our banker.
Chairman Bernanke maintains his growth forecast and standing watch for resurging inflation. Meanwhile, official US economic growth has been revised downward again. This week’s updated sales from Bed, Bath & Beyond, Best Buy, FedEx and Toll Brothers were not good. This is more confirmation that the decline in discretionary consumer sales reported at www.consumerindexes.com is real. The stocks of these four companies have declined below what we look at for justification to keep in any portfolio.
Market sectors that indicate growth, industrials, consumer discretionary and financials have ended the week continuing downtrends. Traditional stimulus for this environment is lower rates. It is difficult to lower from 0.25%. The Fed has no ammunition.
Interest rates for the 2-year Treasury are at historic lows. Today’s Bloomberg.com reports the 5-year Inflation Indexed Treasury yielding 0.23% and the 10-year yielding 1.15%. That is not inflationary, and it is certainly not very growth like. Markets seem to disagree with the Chairman.
New home sales collapsed in May to record lows. California’s home buyer credit is another futile attempt to create buyers where none naturally exist. Demographic demand cannot be created. Government can accelerate activity with bribes – tax credits. The large shadow inventory of mortgage defaults and pending foreclosures will increase supply in coming months driving prices even lower. This is not a positive for home builders and ancillary industries or the general economy.
In general, analysts, politicians and the population at large cannot yet accept lower home prices. When denial passes, the double dip recession will be easier to grasp.
This is deflationary. Adapt.
June 23, 2010 Is Jefferson rolling over in his grave?Posted on 6/23/2010 6:20:43 PM
"I am for a government rigorously frugal and simple, applying all the possible savings of the public revenue to the discharge of the national debt; and not for a multiplication of officers and salaries merely to make partisans." Thomas Jefferson must be rolling over in his grave if able to see our current condition.
We are watching Keynesian policies collapse economies throughout Europe with few governments seriously embracing budgetary reform to deal with excessive debt loads. Certainly, our Congress is not “leading by example” toward a path of resolution.
Others are, in spite of our Administration’s objections. Chancellor Merkel in Germany has quickly responded to citizens complaining of the costs associated with bailing out profligate governments whether Greece, Spain or any other EU member.
In spite the Chancellor’s jawboning, the market will determine the fate of Greece. With Moody’s finally classifying Greek bonds as junk, the chance of default is all but a coin toss.
It is difficult to overlook the fact that many believe bail-outs are banned in EU treaties.
She has proposed budget cuts and an end to unlimited economic stimulus. Austerity and growth are mutually exclusive. It is a choice to make: face reality or to be forced to do so by the market. Germany and the UK are choosing the former to avoid the latter.
George Osborne is the UK’s youngest Chancellor of the Exchequer since 1886. He did not hide the difficulties facing Britain in this week’s speech. Proposing 25% cuts in government spending with significant staffing reductions coupled with tax increases, he has laid out the terms of battle for both parties. Government employees, pensioners and other beneficiaries of the UK’s largess will certainly object. Clean house or become Greece.
It may be a little late in coming, but similar decisions are surfacing here. Union pensions at state and city levels are being altered. Increasing contributions and longer terms of service are but one step forward in reducing budget shortfalls. Where changes are unconstitutional, semi-permanent wage freezes will eventually cause unions to accept the reality of empty coffers. If not, then Meredith Whitney’s forecast of 2 million state level reductions in force is probably conservative.
“Some day, some where, when you least expect it, you will hear ‘Smile, you’re on Candid (Credit).” And, then it will be too late. Every level of our government must deal with uncontrolled spending and reduced tax revenues. Germany and the Brits have chosen to be proactive. Our leaders, on the other hand, well…
China has warned us by allowing the Yuan to float, albeit slowly. Their purchase of Treasuries will decrease thereby putting pressure on prices causing rates to rise hopefully attracting other buyers. If not, then what? “The Chinese will keep treating us like they have us on a yo-yo unless we make a serious push for our legislation," Senator Schumer said on Wednesday. Psst! They do, Senator. Resurrecting Smoot-Hawley type legislation will backfire. China’s manufacturing is moving to lower cost countries such as Viet Nam. Increasing the cost of Chinese imports will only hurt consumers, reducing the breadth of their spending and negatively impacting the economy. That will be fewer jobs and lower tax revenues. The choice is ours to make.
June 10, 2010 NIMBY - Wanna Bet?Posted on 6/10/2010 12:45:05 PM
If it isn’t wages, it is the wage package. What you pressure your employer about may change with the developmental stage of your country, but pressure is mounting globally and has spread to the “Good Ol’ U.S. of A.” Half-way around the world, there are growing Chinese labor movements that will lessen the pricing advantage of “Made in China.” Honda’s price advantage has been in part from its Chinese manufacturing plants. However, unlike Henry Ford, Honda hasn’t figured out how to build a car that its Chinese workforce can afford. The consequence is labor strikes and demands for higher compensation. Strikes have been a growing problem for several years affecting multiple provinces and industries.
We have previously referenced the aging problem in China. With a history of relying on mobile youth for factory work, falling demographics is catching up with demand for labor. Discouraged youth having returned home are less likely to be drawn back to an industrial center. The older we are, the less mobile we are. Even in our 40s, family begins to have roots to hold us. Labor will become more expensive as the declining supply of young laborers imposes market realities on manufacturers as Honda has learned.
As in widely spread Chinese provinces, a budget issue in another state seems remote to us. Problems are increasingly similar and persistent. New York’s lack of cash is not new and is not going away. The cost of pensions and other post-employment benefits, i.e., healthcare, are unaffordable from California to New Jersey.
The Greek riots over cuts in pensions aren’t news any more and seem to be disconnected from anything in our lives. Regardless of nationality, even modest austerity measures are objectionable to recipients of government checks. Disregard the fact that the bank account is empty if the credit card still works.
What happens when the credit disappears as in Greece, Hungary and soon for Spain, Italy and France? The American solution is litigation. Baltimore has no money but owes the police pension system $65 million. It is either pay up (the bank account is empty) or go to court to get out of it. Protests, yes. Riots, not yet.
Solutions are few. Vallejo, California had one, bankruptcy. However, it did not include its largest liability, pension funding, in its resolution. Without restructuring, meaning reductions in future payments, complete default or objectionably high tax increases are inevitable. This is coming soon to a town, or state, near you. If you have a better idea, you need to file papers and run for public office. Good luck! June 2, 2010 Deflation - It's the real thing!Posted on 6/2/2010 2:59:45 PM
Inflation seems real because the federal government reports on it frequently. The calculation of inflation is periodically adjusted to “improve accuracy” or, for the conspiracy theorists, to dampen negative political impact.
The concept of deflation is so far from our current culture’s mentality that it seems surreal. Yet, consumers are benefitting from it regularly without realizing what is happening or its long-term implications.
Consider what you paid for your computer, TV or cell phone just a few years ago. A decade back in time pricing these items would be like a time warp. Imagine what savings you could have if everyday items you purchase, like milk, soda or toothpaste, had prices posted to the web hourly for your neighborhood’s local merchants.
Imagine no more. In Japan, cell phones have apps that do just that. (Undoubtedly, coming soon to a phone you use). Using social networks, Japanese housewives, a pricing army of 25,000+, keep updating prices through a mobile website. Store loyalty has succumbed to spending less money on whatever, whenever and wherever possible.
Last week, the Prime Minister announced that deflation is the country’s largest problem. Second is a financial crisis. Two decades of government stimuli have not stopped deflation.
The demographic cards have been dealt. There is no population segment that will be large enough to spend the economy back to pre-1989 prosperity.
Fortunately, for the U.S., we have a new baby boom that is larger than the post-war Boomers. In another decade, their family spending needs will resurrect our economy. In the meantime, deflation will win the pricing battle.
Categories: none
June 1, 2010 Greece - A Strategic Default?Posted on 6/1/2010 12:03:29 PM
British economists have advised Greece to leave the Euro and default on its debt. There is strong similarity to US homeowners who are so upside down with their mortgages that the economics of continuing to make payments is financially irrational. Yes, it is financially irresponsible, but being responsible won’t improve the situation in the foreseeable future. Greece could create a new currency and reaffirm its debt. That would be like going to bankruptcy court and agreeing to continued payments. Bankruptcy is to clear debt or reasonably reorganize it with a do-able plan. So far, there is no plan for Greece that works and keeps the Euro in tact.
Extracting Greece from the Euro means an explosion in their debt ratio. It means German and French banks become “financially challenged” as if their Greek bonds are investment quality. Incidentally, we haven’t had an update on Timothy Geithner’s “solution” since he left for Europe on May 20th. Perhaps, reality was more difficult than theory. With US homeowners, if you know someone who has “strategically defaulted” the stigma dissipates. The more you know, the easier it is to accept default and restart your financial life. If Greece makes the decision to depart, which of the P.I.I.G.S. is next? Spain? Italy? Ireland has already chomped down on the bitter pill of austerity. It might survive. Portugal? As for the market, remember it is global. We do not know where all of the interconnectedness within the global banking system lies. Do you want to bet on the Bulls stampeding to new highs?
Categories: Economy, Stock Market
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