Daily Investment Interpretations

January 22, 2009

2009-1-22:  The U. S stock markets fell today nearly as much as they rose yesterday, leaving them about halfway between from their close at S&P 850 last Friday and S&P 806 on Monday.   The  NASDAQ declined 41.58 points (-2.76%) ending at 1,465. The Dow jettisoned 105.3 points (-1.28%) to close at 8,123. (The S&P 500 clambered up 35 points (4.35%) to 840. Oil rebounded to $42.68 a barrel, and gold rose to end at  $858.80 an ounce. The VIX climbed slightly points to end at 47.29.    
    One crucial fact that I forgot to mention yesterday is that the Federal Reserve has shot its last monetary arrow at this economic bear and has failed to stop it. This is the first time we've gotten into this situation since the Great Depression. Always in the past, back to the 40's, the problem has been that of fighting inflation by raising interest rates to choke inflationary pressures and expectations out of the system. Then the Fed has been able to restart the economy by lowering interest rates. But this time, it's different. This time, the Fed is fighting deflation, and  lowering interest rates isn't enough. When deflation arose in the 30's, FDR applied fiscal stimulus to pull us out. Problem was (according to Paul Krugman), after FDR's re-election in 1936, he became concerned about the federal debt that government was running up, and cut back on his safety net programs (such as the Works Progress Administration and the Civilian Conservation Corps) only to see the U. S. slide back into recession. The economy wasn't yet ready to walk without crutches. The same thing may happen this time around.
    This highlights a perception problem with government stimulus packages. But note: first, between one-fourth and one-third of the stimulus money comes back to the Treasury in the form of taxes. Second, to the extent to which a stimulus package restores an economy, it converts money-draining relief measures such as unemployment compensation to money-making outcomes that add money to the Treasury. Third, by boosting the Gross Domestic Product (GDP), it improves the ratio of the federal deficit to GDP. (The first two items involve income and outgo; the latter item is concerned with the cumulative deficit.) If we doubled the national debt but also doubled the GDP, then we
wouldn't have changed the ratio of national debt to GDP. (Of course, right now, we're seeing the worst of times, increasing the national debt amid a decreasing GDP.) 
    Since the Great Depression, there's one other, similar crisis: the 1990 Japanese collapse. Fortunately for them, the Japanese were a nation of savers rather than of debtors. The Japanese government fought their deflation using every tool of which it was aware. It succeeded in averting another Great Depression, but even so, Japan entered upon a "lost decade" (which will become two decades if it lasts through 2010). We, on the other hand, are head-over-heels in debt.
    The box score so far is 0 for 2. Most of the steps the federal government is taking are untested experiments. No one knows whether or not what they're trying will work. (Or at least, that's my understanding of what's going on.)
    Here are two upbeat housing assessments. Be forewarned, though, that one of the comments points out that the National Association of Realtors has been calling a bottom in the real estate market all the way down. Also, what may throw a spanner in the works are the layoffs. Of course, people eventually have to have houses, but during the Depression, people moved in with relatives or made do in various ways. 
Housing corrections appears to be nearing an end and Mid-2009 pegged as housing's trough.
    Here are three new Paul Krugman commentaries. Permanent Link to Sad if true. This remark laments the claim that the emerging stimulus plan cuts funding for mass transit to pave the way for tax cuts. 
    Permanent Link to War and non-remembrance refers to economists who are equating the rise in GDP during World War II was less than military spending. But Dr. Krugman points out that the civilian economy during WWII was highly distorted. And I can personally attest to this. For example, no civilian cars were manufactured between 1942 and 1946 (or the end of '41 and the end of '45). Little old widows with no connection to the war effort received "C" gasoline ration stickers that entitled them to three gallons of gas a week. automotive tires were either rationed or not made at all. Even meat was rationed (think Spam). There were wage and price controls. People made and saved a lot of money, buying war bonds with it. They had become frugal savers anyway because of the Depression.
    Dr; Krugman's last article, Permanent Link to Invasion of the DC body-snatchers, refers to the excellent Princeton staff members who have been recruited by Washington in the service of the country.