Daily Investment Interpretations

September 3, 2010

2010-9-3 (Friday The markets rose again today on yet more good news: Smaller-than-feared 54,000 Aug. nonfarm jobs lost, Lessons on the economy: The NASDAQ Composite added 23.17 points (1.06%) to 2,200.01. The Dow gained 50.63 points (0.48%) to close  at 10,320.10, and the S&P 500 increased 9.81 points (0.91%) to end at 1,090.10. Oil closed at $74.91 a barrel, while Gold ended the day at $1,253. The VIX dropped 0.7 to 23.19.  
    One negative for August: the Institute for Supply Management reported that services dropped more for August than anticipated: Services growth slows in August, ISM says. Another negative was that the unemployment rate ticked up to 9.6%. Of course, the total underemployed rate is much higher than this... about 25% of the primary working population.   
    Banks need to come clean on proprietary trading explains that banks like Goldman Sachs are making noises about curbing trading in their own behalf, but it's just that: making noises.   
    Blackwater Won Contracts via Web of Companies points out that when Blackwater received bad press a few years ago, the company set up shell companies to hide the fact that they were getting as much money as ever from the Department of Defense.   
    Make the market work for you gives investment ideas.  
    Obama's dividend: Defense Cuts  is an interesting article written by a former executive editor of the Jerusalem Post. He concludes with, "U.S. defense spending today is nearly half the entire world's. Even if it slashes its military spending by a third, which no one says it should, it would still be more than double the size of that of its global rivals. That would be excessive even had there been no economic crisis. Sadly, there is a crisis, a very bad one that will only get worse if the growth of military spending is not only stopped but reversed. Obama must therefore slash defense spending - deeply, quickly and mercilessly. He should tell Europe and Japan that in today's world they should defend themselves at their own expense, he should abolish military aid to other allies (including Israel) and he should drastically shrink the U.S. military, in both personnel and materiel. That is the only way for America to treat its deficits, restore its economic resilience, and secure the future of its global sway."
    Op-Ed Contributor: How to End the Great Recession Is authored by Robert Reich, a Secretary of Labor in the Clinton Administration. He explains below (excerpted from the article),
    "That is the only way for America to treat its deficits, restore its economic resilience, and secure the future of its global sway. But for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fueled continued growth. How did families manage this trick?
    "First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home (in 1966, only 24 percent did).
    "Second, everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s, the typical male worker was putting in roughly 100 hours more each year than two decades before, and the typical female worker about 200 hours more.
    When American families couldn’t squeeze any more income out of these two coping mechanisms, they embarked on a third: going ever deeper into debt. This seemed painless — as long as home prices were soaring. From 2002 to 2007, American households extracted $2.3 trillion from their homes.
    "Eventually, of course, the debt bubble burst — and with it, the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing. 
    "Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.
    It’s no coincidence that the last time income was this concentrated was in 1928
    He concludes with "The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labor Day lesson we learned decades ago; until we remember it again, we’ll be stuck in the Great Recession."
    OK. Robert Reich is saying that we need to reallocate gains in GDP to the general public... that we have the structural problem that the general public doesn't have enough money to buy the goods and services that our economy can produce, and that the wealthy won't need to buy them because there aren't that many of them.
    Paul Krugman is saying that if we prime the pump sufficiently with federal stimulus money, employment and demand will pick up enough to sustain the economy, albeit at a lower level of GDP than would be the case if the debt-fueled final run-up in GDP rate of growth could be maintained. Paul Krugman makes no mention of the rising disparities between the blue-collar and white-collar/professionals and the über-rich, although I'd imagine that he also deplores this skimming of the fat of the land.
    So which one's right?
    Robert Reich tells us that the J-curve was as steep in 1928 as it is now, so it would seem to me that Paul Krugman's model is still the one to watch as long as we accept an economy that runs at a lower GDP level than would have been projected from 2007.. At the same time, our grandparents managed to alleviate the 1928 inequalities in wealth. Somehow, we have to do this again to, as Mr. Reich says,  reinstate the kind of healthy economy that can compete with the rest of the world.
    My investment advisory service warns that we are still only in the middle of our recent trading range, and that private job creation isn't keeping up with the growing labor force. The unemployment rate is still rising. Caution is still the watchword.