January 30, 2009
markets fell again Friday. The NASDAQ
Composite declined 31.42
the Dow lost 148.15
to end at 8,001,
and the S&P
was essentially unchanged at $41.68,
to close at $928.40.
One of the major causes for Friday's slide was, on the
surface, paradoxical. The Gross Domestic Product (GDP) for the last (4th)
quarter of last year was down 3.8%, its worst quarterly decline since a 6.4%
decline in 1982.
(GDP fell by 0.5% in the 3rd quarter of 2008.
Traditionally, a recession is declared after two consecutive quarters of
negative GDP growth, so by those standards, the recession didn't begin
until the summer of 2008, but the National Bureau of Economic Research,
which gets to decide such matters, has concluded that the recession began
at the end of 2007, "based on job losses and other
Economists had been expecting a GDP decline greater
than 5%, but the number came out better than expected. So why didn't the
stock market rally on this "good news". The problem is that last
quarter saw a buildup in inventories, as factories kept churning out goods
faster than people bought them. This sets us up for a really bad first
quarter of 2009 (to be reported in late April) as factories under-produce
to permit the clearing of existing inventories.
Also, a sizable part of the this "GDP relief"
was provided by government spending. Private spending cratered.
The S&P 500 finished down 8.6% for the month, its
worst January on record. (The second closest occurred in 1916, when the
S&P also fell 8.6% in January. By the end of 1916, the S&P lost
4.19% for the year.) Since legend
has it that as January goes, so goes the rest of the year (the January
barometer), As goes January, so goes the
year?, this doesn't bode well for the rest of the year. However, Mark
Hulbert argues, Don't
write off 2009 yet. The Motley
Research by Quantitative Analysis Service shows that
January is accurate 65% to 75% of the time. (April is the other
"forecasting month".) Dow Jones Indexes give January an
87% accuracy figure since 1979.
However, others have
written off 2009: The worst is still
ahead - and here's why and Gates
predicts four-year downturn.
In Permanent Link to The Geithner put,
Paul Krugman explains that the administration is proposing to buy up only
those troubled assets that have been written way down in value--that is,
deeply discounted. That tends to protect the taxpayer, and it also avoids
paying a bargain-basement price for assets on banks books that are keeping
their assets' declared values where they are, rather than forcing banks to
further reduce the official evaluations of their remaining assets,
lowering their already-dangerously low bank reserves. Dr. Krugman states
that "This might--might--work
out OK.", but that it would mean stockholders taking the risks and
the losses, with stockholders receiving any gains.
In Permanent Link to Damnification,
Dr. Krugman mentions the paradox
While saving money rather than spending it is a good thing for an
over-indebted society, it can be a disaster if everyone does it at the
same time. If people save rather than spend, consumption and production
falls off, leading to layoffs, leading to further cuts in consumption,
leading to further cuts in production, leading to further layoffs. This
means (1) that people who want to pay down debt won't be able to do it if
they lose their jobs, and (2) if prices and wages fall over time, debts
become relatively larger and harder to pay off even for those who keep
their jobs. Dr. Krugman writes, "and we're only in the early stages
of a slump that, in the words of the Congressional
Budget Office director,
'absent a change in fiscal policy, CBO projects that
the shortfall in the nation's
output relative to potential levels will be the
largest--in duration and depth--since
the Depression of the 1930's.'"
He concludes that, "yes, running up large debts is
risky; but dong nothing is even riskier."
In Permanent Link to Saving, investment, Keynes, evolution,
Paul Krugman laments the lack of knowledge of fundamental economics that
is being displayed by some vocal economists... like discovering that some
eminent biologists are not only creationists, but "have never heard
of the the theory of evolution and the concept of natural selection".
In Permanent Link to Another temporary misunderstanding
and Permanent Link to Read before linking (wonkish),
he refers to someone who is arguing that a temporary increase in
government spending would have a smaller impact upon demand than a
permanent increase. Dr. Krugman argues that a permanent increase in
government spending entails the government's paying cash for their
added spending--it becomes a line item in the federal
budget--whereas a one-time expenditure can be "put on the credit
card" with the repayment spread out over a period of
In Permanent Link to Breathtaking and staggering,
Paul Krugman quotes Dean Baker, who's having some fun
with the Washington Post's generous use of staggering, overwhelming,
ginormous superlatives in describing the expense of the stimulus plan. Dr.
Krugman points out that the Bush tax cuts cost about $2 trillion over the
course of ten years. He saks, "Did the Post find this cost
staggering? Inquiring minds want to know."
From Minyanville, we have, "Five Things You Need to
Know: Conspiracy of Fools." and "Five Things You Need to Know- America Has Always Depended On the Kindness of Strangers",
both by Kevin Depew. The second article points out that at the bottom of
the 1974 recession, our debt to Gross Domestic Product maxed out at 1.08.
Today, it's nearly 4-to-1... too much debt for too little real income. It
points out that in spite of all the money the government is printing,
there is actually a shortage of dollars. (Remember that dollars are the world's
reserve currency.) Kevin Depew argues that gold should be down in the $600
to $700 range by early 2010, as holders of gold sacrifice their precious
metal store to get more dollars. Finally, the article calls for a
continuation of today's gloomy mood at least for another year.