Daily Investment Interpretations Archive

July 1, 2010, to December 31, 2010

. January 1, 2010, to June 30, 2010
 July 1, 2009 to December 31, 2009
January 1, 2009, to June 30, 2009
July 1, 2008, to December 31, 2008
May 7, 2008, to June 30, 2008

2010-9-1 (Wednesday):  The markets rose nearly 3% today on good news: Bulls storm into September. The NASDAQ Composite climbed 62.81 points (2.97%) to 2,176.84. The Dow rose 254.75 points (2.54%) to close  at 10,269.47, and the S&P 500 added 30.96 points (2.95%) to end at 1,080.29. Oil closed at $74.00 a barrel, while Gold ended the day at $1,247. The VIX dropped 2.15 to 23.90. 
    The articles listed here don't seem to offer particularly good news, but the manufacturing index was up slightly for August when it was expected to have fallen.
    Private-sector payrolls dip  
    Factories add fuel to fire  
    Mark Hulbert gives us September by the numbers, and the news isn't good. September comes by its unsavory reputation honestly. The markets will probably end this month a few percent lower than they began them today.
    Nick Godt has written: Denial symptom No. 36: Cyclicals stocks lead  
    High correlations reveal unhealthy market  
    Wage growth collapses  
    Michael Ashbaugh writes: Track a trendless market.  
    Silvia: Double-dip odds now 1 in 20  "Wells Fargo chief economist John Silvia calls the ISM report 'a shocker'. He tells MarketWatch News Break the odds of a double dip recession are now one in twenty."

2010-8-31 (Tuesday):  The markets ended the day essentially unchanged. The NASDAQ Composite moved down 5.94 points (-0.28%) to 2,114.03. The Dow rose 4.99 points (0.05%) to close  at 10,014.72, and the S&P 500 added 0.41 points (0.04%) to end at 1,049.33. Oil closed at $71.79 a barrel, while Gold ended the day at $1,249. The VIX dropped 1.16 to 26.05. 
    The markets began the day moving up on good news: U.S. home prices rise and August consumer confidence rises to 53.5, but then sagged when the minutes from the last Fed meeting were released: Reinvestment plan sparks FOMC debate, minutes reveal.  
    Brett Arends observes that many of Ben Bernanke's predictions have proven false: Bernanke's tiresome schtick:  "On forecasts, the Fed chairman is about as useful as a New England weatherman.". He goes on to day, "Bernanke keeps talking about bank lending and consumer confidence. But how can anyone look at the most indebted nation in the history of the world and say it is suffering from a lack of credit? And why on earth should consumer confidence miraculously pick up when those consumers are broke and out of work? Is he suggesting we start handing out Vicodin? Should we legalize pot?    ...look at the numbers. American families, according to the Federal Reserve itself, already owe $13.5 trillion. That is twice what they owed ten years ago, and four times what they owed twenty years ago. For all the talk of people repairing their balance sheets, that figure has fallen by a grand total of 2.7% from its all-time peak in 2008.
    He also addresses the unemployment situation. He notes that: "25% of men of prime working age in America, one in four, today lacks a full-time job. Nearly one in five lacks any job at all. This is unprecedented in American history."
    Death of equities exaggerated. The author says, "In fact, rather than leaving stocks behind, evidence suggests that investors are ditching U.S. stock mutual-fund managers and putting money into index funds that track established U.S. stock benchmarks as well as international stock funds."
    Stock market future are up about ⅔ % tonight. 

2010-8-30 (Monday):  The markets went south again today. (So much for staying power.) The NASDAQ Composite moved down 33.63 points (-1.56%) to 2,119.97. The Dow dropped 140.92 points (-1.42%) to close  at 10,009.73, and the S&P 500 fell 15.67 points (-1.47%) to end at 1,048.92. Oil closed at $74.03 a barrel, while Gold was unchanged at $1,239. The VIX climbed 2.76 to 27.21. 
    Recession won't end until 2011  A survey of business executives reveals that they believe the country is, for all practical purposes, still in recession, and will be until sometime next year.
    Savings rate dips in July  Consumer spending outran growth in personal incomes in July.
    Hedge-fund managers get more bearish on equities  The interesting quotation in this article is that some hedge fund managers have had their heads handed to them on a plate by betting on rising interest rates.
    Time to reappraise China growth outlook 
    Small-business hiring slows; outlook worsens  
    My investment advisory service warns that economic conditions are being painted as more worrisome than they actually are. Mark Hulbert echoes this optimism in The news isn't all bad, pointing out that corporate insiders are buying shares the way they did in March-April, 2009. But he also warns that insiders were spectacularly wrong in the 2007-2008 bear market.

2010-8-29 (Sunday):  Expert rips fiscal-policy 'alchemy' This article by Indiana University professor Eric Leeper asks, "Does any model exist to show that 18 months ago it made sense for the United Kingdom to expand fiscal policy, while now it makes sense to implement the recently announced 25% nearly across-the-board budget cuts? Leeper's remarks came a day after European Central Bank President Jean-Claude Trichet argued that across-the-board deficit reduction was the best strategy to foster growth in Europe and global economies after the global recession. Leeper said there is no evidence to support Trichet's view."
     J.P. Morgan lowers its oil futures price forecast This article is interesting because of its projections for global growth: "'With global manufacturing growth set to halve over the coming months and projections of developing market growth being ratcheted down, it is hard to argue that this will be any more than a temporary bounce,' Morgan said" (referring to the recent uptick in oil prices. J. P. Morgan is forecasting oil prices in the 60's by October.)
    Jackson Hole dispute: more economic medicine? This article explains the positions of some of the players in the economics arena.
     Death of Equities, Part 2 This article, drawing parallels with the 1979-1982 era, suggests that recent articles proclaiming the death of the stock market may be pointing toward a new super-bull market. The problem with this, as I see it, is that in 1979, we were in the 13th year of the 16-year, 1966-1982 super-bear market. Today, we're in the 10th year of the 2000-2016 super-bear market. Investors will eventually return to the equity markets, but it may not happen before the next super-bull market gets well underway. (And note that when the equity markets took off in mid-August, 1982, most small investors didn't re-enter the stock market until the bull market of the 80's and 90's had proven itself in the mid-80's. Also, P/E, P/D, and P/B ratios were very much lower than they are today. 
     U.S. stock market facing tough data, tough month  "'The fear of deflation is what caused the market to correct in the last three weeks, since what you don't want to own in deflation is any sort of asset, since it'll be cheaper next week,' said Pado. The days ahead bring plenty of key economic releases, including July income and personal consumption figures to start the week and culminating with the August employment report. A mid-week read on manufacturing activity in August could be pivotal, given 'manufacturing had been what carried us through the early part of the summer,' before slowing in July, said Pado. While the reports are likely to show further economic deterioration, both Pado and MF Global's Kalivas said the impact on Wall Street is debatable, given the negativity already priced into the market. That said, while Pado does not expect September to be a good month for Wall Street he does believe the stock market is building a base at the bottom end its current range, with the market typically shifting gears in the final quarter, which brings the holiday shopping season and fourth-quarter corporate investment in technology.
    Paul Krugman wrote yesterday: Permanent Link to Failure To Rise. He concludes with. "the important thing is that all signs are that the next few years will be a combination of economic stagnation and political witch-hunt. This is going to be almost inconceivably ugly."
    Today, he's written, Permanent Link to Predictions I Wish Had Been Wrong: 

"Looking for some other stuff, I found this post from October 2008 in which I predicted a level of right-wing craziness about Obama similar to that facing Bill Clinton, but worse.

"I really, really wish I had been wrong about that."

    My investment advisory service recommends maintaining current holdings through the coming week,  though their signals are at the low end of their neutral range.

2010-8-28:  I was wrong about Nouriel Roubini. I found a video clip of the interview with Dr. Roubini: Chances of Double Dip Now Over 40%: Roubini. His prediction of a GDP that's less than one and closer to zero than to one refers to third-quarter GDP rather than to second-quarter GDP. And here's the interview with Mohammed El-Erian: Economy Losing Momentum For Recovery: El-Erian.  
    Barclays: Markets Pricing In Something Between A Recession And A Deflationary Depression  
    US Needs More 'Juice' — From the Fed: Economist  
    Here's a picture of the Republican plan to straighten out the economy: Boehner’s Pro-Growth Message: Is a Mighty Stock Rally Next?. What is Representative Boehner's pro-growth message? extend all the Bush tax cuts; enact constitutional limits on government; repeal the national cap-and-trade energy tax; enact an aggressive spending-reduction package that would rollback non-defense discretionary expenditures to 2008 levels, freeze federal pay and hiring, eliminate transfer payments to the favored few (Social Security? Unemployment Compensation?), restore supply-side tax policies, and end TARP and all TARP bailouts. [Huh? TARP (Troubled Assets Relief Program) was a Republican emergency program aimed at keeping the banking system from collapsing, and designed and administered by Republican Treasury Secretary Hank Paulson.]

2010-8-27:  Well, shiver me timbers! The economic news this morning was all better than expected, and the markets have responded in kind: Stocks leap as Bernanke pledges to defend recovery, Treasury yields up most since June. The NASDAQ Composite moved up 34.94 points (1.65%) to 2,153.63. The Dow increased 164.84 points (1.65%) to close  at 10,150.65, and the S&P 500 lifted 17.37 points (1.66%) to end at 1,064.59. Oil closed at $75.42 a barrel, while Gold moved down to $1,239. The VIX fell 2.92 to 24.45. 
    This is certainly better than it would have been if Nouriel Roubini had been right and the 2nd-quarter GDP had come in below 1%. It also says things about Dr. Roubini. However, before we pop the champagne corks, it might be noted that although things aren't as cataclysmic as they were purported to be, they're still quite ominous: In charts: What we learned about the economy, together with this, Permanent Link to Invisible Cavalry To The Rescue!, and this Permanent Link to Nobody Could Have Predicted, from Paul Krugman. There's a chart in this last article showing the recent GDP progression, and it looks like this:

    Of course, we won't know until we get there, but it looks as though the logical next bar in this sequence has a height that's at or a little below zero. 
    The charts shown in the first article are also an eye-opener. They're trending relentlessly downward. Finally, Dr. Krugman's Permanent Link to Invisible Cavalry To The Rescue! comments on Dr. Bernanke's comments this morning, including the phrase that inflation expectations are well-anchored. 
    Here are three additional articles concerning what happened at the Jackson's Hole meeting this morning:
    Roundup of reaction to Bernanke's speech   
    Pushing back at more easing  
    Trichet sticks to guns in Jackson Hole. 
    Basically, it is that central bankers are sticking to the story that prosperity is just around the corner, and that nothing further needs to be done to stimulate the world's economies. Things will pick up in 2011.    
    Talk with Robert Shiller (video) Dr. Schiller, of "Schiller Index" fame, believes that there is a greater-than-50-50 chance of falling back into recession.
    Today's action was nice, but we'll see next week how much staying power it has.

2010-8-26:  This morning's unexpectedly improved jobless number--473,000 compared to the 495,000 that MarketWatch had predicted--gave the stock market an opening boost but it didn't last: Stocks slide as cheer fades. The NASDAQ Composite fell 22.85 points (-1.07%) to 2,118.59. The Dow lost 74.25 points (-0.74%) to close  at 9,985.81, and the S&P 500 subtracted 8.11 points (0.77%) to end at 1,047.24. Oil closed at $73.44 a barrel, while Gold moved down to $1,240. The VIX rose to 27.37. 
    Apparently, everyone is waiting on tomorrow's numbers (the downward revision to the GDP, and the consumer confidence reading) and upon Ben Bernanke's speech.
    A level of 1,040 on the S&P 500 index is a "line in the sand". A close below this level would signify a downward breakout of the current trading range. If this should happen tomorrow night, then to paraphrase "Anthony and Cleopatra", 'Rome will in Tiber melt and wide arch of the rang'd empire fall'.
    Nouriel Roubini ("Dr. Doom") is predicting that 2nd qtr. GDP will be revised to "well below 1%" and could wind up being close to 0. It seems to me that Dr. Roubini has laid his reputation on the line with this specific forecast. Now, PIMCO's CEO, Mohamed El-Erian, whom I quoted on August 20th as having put the odds of a double-dip recession at 1-in-4 has just tonight endorsed Nouriel Roubini's dire assessment of the economy. Both Dr. El-Erian and Dr. Roubini agree that the risk of recession is rapidly rising. My investment advisory service, which, so far, has bought the thesis that this is just a temporary soft patch in the road, and that the recovery will slowly continue, has been shaken by Dr. El-Erian's ratification of Dr. Roubini's warning. If the 2nd-qtr. GDP is revised below 1%, it would suggest to me that GDP growth is negative by now. Of course, that would not necessarily make this a double-dip recession, since a recession requires two back-to-back quarters of negative growth. Still,...
    Irish woes continue to flow This is another reminder that Ireland's austerity program seems to be backfiring.
    Bond buyers are killing the recovery This article refers to the fact that ultra-low bond interest rates are fueling a feeding frenzy of mergers and acquisitions.
    S&P 500 to retrace steps to 900, and S&P 500 to hit 450, SocGen strategist warns  When these kinds of gloom-and-doom articles appear, it's usually a sign that the markets are about to turn around and go up.
    Ex-Fed banker: Low on ammo  The Fed's former vice-chairman, Alan Blinder, warns that the Fed is running low on ammunition, and that buying private assets... corporate bonds, small business loans, and credit-card receivables... would be more effective than buying U. S. Treasuries.

2010-8-25:  After diving this morning, the markets recovered this afternoon in what is, in all likelihood, a dead-cat bounce. The NASDAQ Composite rose 17.78 points (0.84%) to 2,141.54. The Dow gained 19.61 points (0.2%) to close  at 10,160.06, and the S&P 500 added 3.46 points (0.33%) to end at 1,055.33. Oil closed at $72.68 a barrel, while Gold moved up to $1,243. The VIX fell to 26.87.
    My investment advisory service gives four reasons for the disconnect between s stellar earnings season and so-so performances of the stock market indices:. 
    First, by the time a stellar earnings season arrives, stocks have generally discounted it and have moved on to what's going to happen six-to-nine months later.
    Second, the macroeconomic outlook is pretty bad, with a decelerating economy encouraging investors to wait and see how far the deceleration will go.
    Third, some companies have had trouble keeping their revenues up with their earnings.
    Fourth, with high-frequency traders accounting for 70% of the daily volume on the new York Stock Exchange, correlations among stock prices are at an all-time high. That means that prices of individual stocks tend to move with the overall market rather than depending upon the intrinsic values of the underlying companies.

2010-8-25 (Afternoon):   My investment advisory service concludes that what's driving the markets now is raw fear because of the downbeat economic news... i. e., an overreaction. 
    Mark Hulbert: Contrarian take on the bond market. Mark Hulbert points out that, over the next century, bond yields (and inflation) are apt to be higher than they are right now. For that reason, now is probably not a good time to be buying bonds (unless, of course, we're heading into deflation, in which case, current bond yields would look pretty good.
    U.S. 10-yr yields hit lowest since January 2009  The 2-year Treasury note . The 10-year Treasury bond is currently at 2.48%, after testing 2.42%. It closed at 2.50% last night. The 30-year Treasury bond is currently at 3.54%, after touching 3.47%. It closed at 3.57% last night.
    Banks fall after weak housing, manufacturing data. The durable goods order, which Marketwatch had predicted would rise 2.7%, instead rose an anemic 0.3%. 
    New-home sales, which MarketWatch had predicted would come in at an annualized 339,000, up from 330,000 in June, amounted to 276,000. Furthermore, the June number was revised downward to 315,000. July new-home sales fall to record low pace  

    Rex Nutting: Two dangerous myths about the stimulus  
    Liz Miller sees good news amid all the bad  
    Bond frenzy fuels M&A while economy burns.   
    This article, Fed retreats to the mountains as economy slumps, written by MarketWatch columnist Nick Godt, repeats the Paul Krugman refrain that political and ideological gridlock is paralyzing federal remediation efforts for the economy. (Remember that the Fed is still predicting GDP growth of 3%-to-3.5% for this year.) We'll get a reading on this Friday when the revised, 2nd-qtr. GDP is announced. 
    Tomorrow, the weekly unemployment number will be announced. Last, week, it was an unexpected 500,000, which spooked the markets. MarketWatch predicts a value of 495,000 for tomorrow.
    On Friday, the revised, annualized, second-quarter GDP figure will be released. Marketwatch expects that it will be 1.4%. A consumer sentiment number will also be published. MarketWatch expects that consumer sentiment will fall from 69.6 last month to 68.5 this month.

    From CIA to BIA: Spotting execs who bend the truth  
    Pentagon CFO sees modest growth in 2012 budget  
    Where the optimists are

2010-8-24:   The markets took a bath today: U.S. stocks crater, sending Dow to six-week low. The NASDAQ Composite, down 35.07 points (-1.66%) to finish at 2,123.76, took an even bigger hit than it did yesterday. The Dow dwindled 39.21 points (-0.38%) to close  at 10,174.41, and the S&P 500 declined 4.33 points (-0.4%) to end at 1,067.36. Oil closed at $72.82 a barrel, while Gold moved down to $1,227. The VIX rose slightly to 25.66.
    Money manager tells Brett Arends: Strap in and hold on tight quotes star money manager Charles De Vaulx, who believes that the U. S. government will step in and keep the U. S. from sliding into a double-dip recession, but that GDP growth will average 2% to 2.5% only a year for the next few years. Mr. De Vaulx offers some recommendations for investments that should breast the tide over the next few years. Mr. Vaulx manages the prosperous IVA Worldwide mutual fund.
    Ireland downgraded on concern about bank bailouts. This is of interest because Ireland embraced austerity two years ago, and who, if the deficit hawks are right, should now be enjoying credit rating upgrades. Instead, it appears to be trending downward, as foreseen by Paul Krugman.
      In other indications of the times, 
Retail stocks drop, led by Barnes & Noble
Baker: Home prices could sink another 15%
South Africa's growth slows in second quarter
Stone: Double dip recession not yet priced in. This article mentions that Burger King reported weakening sales along with Barnes and Noble.... "continued temporary soft patch weakness which makes the already nervous investor more nervous."
Savers beware: Interest rates dip below 1%: "Earlier this month, Geller predicted that interest rates on deposits would continue to fall as banks look for ways to make up for the loss of fee income as a result of new regulations on electronic funds transfers."
    Michael Ashbaugh advises us: U.S. markets poised to retest major support.
    Paul Farrell warns us that the Righteous Right leads us straight to WWIII.
    Irwin Kellner suggests that we're already back in a recession (Blowing in the wind)... unless we failed to come out of the first recession. (The Conference Board has never officially declared that the Great Recession is over.) "It is not hard to see why the economy is struggling. As anticipated ( See my column of Aug. 3), the push from inventories appears to have faded. So has the stimulus from the housing tax credit and the government's "cash for clunkers" program. Washington has laid off temporary census workers, while many states and local governments are furloughing people as well. For its part, the private sector is creating few new jobs while terminating many."
    My investment advisory service still sees what's happening as trading at the lower edge of a trading range, although its investment indicators are flirting with a "sell" signal.
    One long-term trend that I think might be continuing leveling of living standards and real wages between the developed world and the developing world. 

2010-8-24 (This Afternoon):   After the wicked recessionary reading from the Philadelphia Fed last week, the Richmond Fed Index has fallen in August: Full Richmond Fed release (but is still positive). 
    Yields on Treasury bonds probed new lows today, , with the 2-year yield dropping to 0.47% (after touching 0.45%), the yield on 10-year Treasuries closing at 2.50% (down from yesterday's 2.58%) and the yield on 30-year Treasuries at 3.57%, down from yesterday's 3.66%.
    Paul Krugman just posted this article and chart: Permanent Link to 2.53. (He finished this at 1 p. m. Eastern time.)

    The time frame labeled "1" on Prof. Krugman's chart was the period when fear of the phantasmagorical "bond vigilantes" drove up interest rates in anticipation of supposed reluctance to buy U. S. Treasuries. 
    The interval labeled "2" on Dr. Krugman's chart is when, in December, 2009, Morgan Stanley predicted that yields on 10-year Treasury bonds would be running 5½ % right about now. As we know, the actual number today is 2½ %.
    The "3" on the chart is this April when the Wall Street Journal announced that fears about the huge U. S. deficit was going to send interest rates on U. S. Treasuries higher and higher. Instead, they dropped from 4% to 2.5%.
    Stimulus plan boosted GDP by as much as 4.5% - CBO  
2010-8-24 (This Morning):  Believe it or not, my investment advisory service is suggesting that hedge funds are piling into Treasury bonds, having gone from $0.3 trillion invested in Treasuries to $2.0 trillion in the past year. Of course, this could be Great Recession 2.0, but it could also be a bond bubble. In the meantime, new housing starts showed a 27% drop in July, which is a bit more than the 11% decline expected Sunday's MarketWatch consensus table: Existing-home sales plunge 27.2% in July. My investment advisory service doesn't think this is The End, but their actions will be guided by their indicators (which so far, aren't quite shouting, "Sell!").

2010-8-23:   The NASDAQ Composite, down 20.13 points (0.92%) to finish at 2,159.63, took quite a hit. The Dow dwindled 39.21 points (-0.38%) to close  at 10,174.41, and the S&P 500 declined 4.33 points (-0.4%) to end at 1,067.36. Oil closed at $72.82 a barrel, while Gold moved down to $1,227. The VIX rose slightly to 25.66.
    I said last night that I would discuss the article, Inflation, not deflation, Mr. Bernanke, this morning. This morning had other plans for me, but here's what I was planning to say. (Once again, it's 11 p. m. and I haven't had time to write more than this.)
    The article's author, Andy Xie, explains that enough of the 2009 Western stimulus money played through to emerging market economies to stimulate them mightily. For example, U. S. consumers, looking for ways to cut expenses, bought more goods from East Asia, and "U. S." global corporations, looking for ways to boost productivity, outsourced more jobs to East Asia. As a result, emerging market countries are grappling with inflation, while developed countries are girding for possible deflation. Mr. Xie says that 10-year U. S. Treasuries are at 2.8% (??? This article is date-lined August 22, when 10-year Treasuries were yielding 2.62%. However, 10-year Treasuries would have yielded 2.8% ten days ago.) "Oil has climbed above $80 per barrel again. Copper is back above $7,000 per ton, closing in on the pre-crisis peak." (Oil closed tonight at $72.82 a barrel.)
Point is: The Western stimulus money didn't much stimulate the West as was intended. Instead, it was spent in emerging nations, where it supercharged some emerging market economies, leading to future financial bubbles. Some of these nations are already experiencing 5% inflation rates, and are raising interest rates to cool their economies. (Historically, in the U. S., there's been a two-year lag between the raising of interest rates and the inflation peak. By that time, inflation rates could reach 8%-9%.) Andy Xie argues that this overheating of emerging nations' economies will lead to inflation in the West, imported from the emerging nations. And as for the West, he says, "The temporary deflation due to suppliers cutting costs at the expense of profit margins will not last."  
    I'll have to try again tomorrow to find time to finish this material.

2010-8-22:  In Looking beyond the gloom, the authors present the case that "the recent weak data is a 'mini-cycle within the cycle' and not a double-dip recession. When trade and inventory behavior are stripped away, underlying domestic demand was fairly strong in the April-to-June quarter. Final sales to domestic purchasers, which is GDP with inventories and external trade stripped out, will be revised up from an already strong initial estimate of 4.1%, said the economic team at Capital Economics in Toronto."

    It will be interesting to see how well these Marketwatch forecasts agree with the numbers that are actually announced this week. Marketwatch is forecasting 1.4% for the 2nd-Qtr. GDP, compared to a prediction of 1.1% by Goldman Sachs.
    This article, Bonding with income, recites the returns on junk bond funds vs. their risks.   
    "Douglas Cliggott, U.S. equity strategist at Credit Suisse, in an Aug. 20 report cited three forces that have driven 10-year yields below 3%.
    "'One is investors lowering their U.S. economic growth expectations. A second is good old-fashioned performance chasing. And the third, and perhaps the most important, is many Americans losing their appetite for risk,' Cliggott wrote. 'We believe the demand for U.S. financial assets with relatively high yields and relatively low volatility could remain elevated for several years.'"

    I originally began writing this Investment Interpretations page in May, 2008, thinking I had strategies for surfing the upcoming recovery. More than two years later, the recovery looks less certain than it did in May, 2008. I've also learned just how frail a vessel I am when it comes to understanding what's really going on in these markets, and how dependent I am upon expert advice. The "core" GDP estimate of 4.1% for the second quarter of domestic GDP growth is a case in point: it's information that I never saw in the news releases about GDP growth, without this kind of information, it's quite hard to make sound investment decisions. I suspect that institutional investors have this kind of information and interpretation available to them. Edward Yardeni seemed to have a solid grip on trends and their meanings during the 80's and the 90's. In an August 12th interview, he paints an upbeat picture: Ed Yardeni, President, Yardeni Research.
    Here's another interesting treatise that i just found: Inflation, not deflation, Mr. Bernanke. This article is so good that it deserves more time than I can give it at 11 p. m. tonight. I'll revisit this topic in the morning.  
    In striking shift, Small Investors Flee Stock Market  

2010-8-21:  In Permanent Link to Bond Madness, Paul Krugman reviews some of the (in his view) nutty justifications given for why interest rates were going to surge by this time in 2010. He suggests that the first of these, the "carry trade bubble", may have cowed the Obama Administration into eschewing an attempt at a follow-on stimulus package at a time when it might still have done some good. Noriel Roubini floated this phantasmagoria back in the November 2, 2009, Daily Investment Interpretations (along with Todd Harrison). For all I know, this unwinding of the carry trade may still  happen, but it would have afforded a very bad justification for raising interest rates last fall. 
    He also mentions that Goldman Sachs estimates that the revised second-quarter GDP will be only 1.1%, and will go downhill from there. 
    Another interesting comment someone made in response to an article is that although earnings are rebounding thanks to increases in productivity, revenues are falling. And rising earnings can't continue very long in the face of falling revenues.
    Marketwatch columnist Nick Godt writes, No, it's not a bond bubble. He explains that stock fund managers watching money pouring from the stock market into the bond market have strong incentives for claiming that the bond market is a bubble. 
    In reviewing some of the links in the right-hand box on this page, I realize that right now, the best investment vehicle we can find may be cash until we see which way the markets are going to break. The markets always climb a "wall of worry", but right now, things appear to be, as the Fed put it,  "unusually uncertain".
    In the interest of balanced reporting, here's an assessment by Howard Gold: Gloom and doom all over again.

2010-8-20:  The stock market ended a bit lower today: Retailers edge lower; Ann Taylor a bright spot.  The NASDAQ Composite ended up 0.81 points (0.04%) to finish at 2,179.76. The Dow shifted down 57.59 points (-0.56%) to close  at 10,213.62, and the S&P 500 declined 3.94 points (-0.37%) to end at 1,071,69. Oil closed at $74.00 a barrel, while Gold moved down to $1,229. The VIX dipped 0.89 to 25.55.
    It would seem that even the experts don't know what's coming next (although that won't keep them from telling you what's coming next... "...often in error, never in doubt.") Paul Krugman today is again presenting his view that many economists can't seem to get past their fantasies and prejudices to recognize even what has already happened: Permanent Link to Expansionary Austerity?. He gives as an example, the interest rate forecast prepared by Morgan Stanley for their clients early this year. Last December, Morgan Stanley predicted that the interest rate on 10-year Treasuries would be about 5½ % about now. Instead, it's 2.62% tonight. (Morgan Stanley apologized to its customers yesterday.) Other primary dealers weren't much better than that, with JPMorgan Chase & Company, and Royal Bank of Canada prognosticating 4.5% for 10-year Treasuries. His key point is the alleged incompetence of the economists and politicians who are leading us.
    So who's right? I suspect that we will get an answer before the year is out.
    PIMCO's Mohamed El-Erian sets the chances of deflation in the U. S. at 1-in-4. Other economists estimate the odds to be somewhat higher: Preparing for Inflation and Deflation, and Funds Look to Dangers of U.S. Deflation. Meanwhile, bond yields continue to fall: Treasuries rally this week on flight to safety.   
    Roster of dividend-payers  

2010-8-19:  Equity markets dove into the canvas today: Bulls battered as Dow falls. The NASDAQ Composite fell 36.75 points (-1.66%) to finish at 2,178.95. The Dow dropped 144.33 points (-1.39%) to close  at 10,271.21, and the S&P 500 declined 18.53 points (-1.69%) to end at 1,075.63. Oil closed at $74.35 a barrel, while Gold moved up to $1,234. The VIX ratcheted up 1.85 to 26.44.
    More tough U.S. economic times forecast by Congressional Budget Office (CBO). and Economic numbers point to darker outlook    The CBO forecast still holds GDP growth for the year at 3%. However, 2Q GDP growth is expected to be revised downward to 1.4% next Friday, leading to average GDP growth for the 1st half of 2.55%. Average growth for the 2nd half would have to be 3.45% to generate a 2010 growth in GDP of 3%. I don't think that's going to happen. Methinks we might possibly re-enter recession before this quarter is over.
U. S. Treasury Yields Hit New Lows        
    U. S. Treasury interest rates hit new lows today: Treasurys yields fall to new lows after poor data. The yield on the 2-year Treasury bond hit its lowest level ever, at 0.47%, rebounding to 0.48%. The yield on the 10-year Treasury bond touched a new low of 2.56% before rising to 2.57%. The yield on the 30-year Treasury plumbed a new low at 3.62% before returning to 3.65%. This comes after a brief, slight upward move in interest rates following the Fed's first purchase of Treasury bonds this week.
    "'The current low levels of bond yields, and even further falls, would be consistent with the prospect of a very long period of near-zero short-term interest rates, low or negative inflation, and lackluster returns on riskier assets that increase demand for the safety of government bonds,' said Julian Jessop at Capital Economics.
    "'An asset bubble develops when prices move far out of line with anything that could reasonably be justified by fundamentals,' he said, noting that's not the case with bonds currently."
    The above article directly contradicts Marketwatch Editor David Callaway's article: Big investors pull exit chute, beer in hand that warns about a developing bubble in the bond market that will allegedly take down all asset classes when it bursts.
    James Bullard is the Governor of the St. Louis Federal Reserve Bank, and is the Fed governor who recently went from worrying about the risks of inflation to worrying about the risks of deflation.  Bullard: Fed may act if disinflation risks grow
The Beginning of When China Rules the World?
    China has been moving to take over from the United States as the world's leading nation, and to replace the dollar with the yuan as the world's reserve currency. These are long-term plans with timetables measured in decades, but this is the direction in which China is heading. In one of the first moves in this direction, MacDonalds is selling bonds for its Chinese expansion in yuan rather than dollars. McDonald's sells yuan bonds for China expansion. And as you can imagine: China to encourage more foreign yuan-bond issues.  
Are Many Jobs No Longer There?
    In Job mismatch stymies economic growth , Minneapolis Fed bank president Narayana Kocherlakota explains that for about one-third (6.5 million) of all unemployed U. S. workers, the jobs they left no longer exist. These employees will have to be retrained for different work to find jobs when the economy recovers. 

2010-8-19 (Afternoon):  Initial claims tip 500,000 and Philly Fed index negative for first time in year are behind the markets' malaise this morning. (But note that the recent extension of jobless benefits may be temporarily boosting initial unemployment claims.)
    On the other hand, the Conference Board's Index of Leading Economic Indicators is still pointing toward a slow recovery: Leading indicators point to slowing economy.
    The Conference Board's Index of Leading Indicators after rising 0.5% in May and falling 0.3% in June, rose 0.1% in July (for a three-month average rate of rise of 0.1% per month). "'The indicators point to a slow expansion through the end of the year,' said Ken Goldstein, economist at the Conference Board. 'With inventory rebuilding moderating, the industrial core of the economy has moved to a slower pace,' he said, adding there's no change of pace in the service sector. 'However, the good news is that the data do not point to a recession.'"
    The Coincident Index rose 0.2% in July.
    Among the components of the index that fell during July were:
    (1) consumer expectations,
    (2) building permits,
    (3) real money supply and stock prices,
    (4) manufacturers' new orders for consumer goods, and
    (5) materials,
while, on the other hand:
    (6) interest rate spread,
    (7) average weekly manufacturing hours,
    (8) index of supplier deliveries,
    (9) average weekly claims for unemployment insurance, and
  (10) Manufacturers' new orders for non-defense capital goods
rose during the month.
    And on the third hand, today's boost in the three-week average for jobless claims ("Claims had fallen as low as the 427,000 level in mid-July but have worsened steadily since and now have increased for three straight weeks. Read the full government report."), along with the sharp reversal in the Philadelphia factory sector, point toward further reductions in the Index of Leading Indicators for August when the Index is updated a month from now.. 
    H-P culture crumbled further under Hurd Apparently, Bill Hurd completed the job that Carly Fiona began. He brought HP to profitability, but by selling the future to buy the present, riding the company's reputation into the ground.  

2010-8-18:  This has been a ho-hum day in the trading pits. The NASDAQ Composite ended up 6.26 points (0.28%) to finish at 2,215.70. The Dow eased up 9.69 points (0.09%) to close  at 10,415.54, and the S&P 500 was nudged 1.62 points (0.15%) to end at 1,094.16. Oil closed at $75.30 a barrel, while Gold rose $6 to $1,233. The VIX added 0.26 to 24.59.
    Marketwatch columnist Rex Nutting has created quite a stir by writing Is there anyone the right doesn't hate? Otherwise, there's almost nothing to report.
    Stock market futures are up a little tonight.  
    The picture below was taken in 1930, exactly 80 years ago. The not-too-happy camper in the foreground is me. At the time,
      
Dad and Mother were living in a "double house" across the street from the house below. The two houses in the background are next-door to the house below (with a vacant lot in between), where we moved in 1931 when I was two. Virtually all new building in the United States ceased in 1929, and remained frozen for 16 years, from 1929 to 1945. The houses in the background are  "double houses"... two independent houses for two independent families, each with its own front and back door... like the "double house" in front of which this picture was taken.
    The caption that goes with this was, "You're telling me that Santa Claus gets down all the chimneys in the world in one night? OK. How about the Easter Bunny?"  
    These suburbs were made practical by the advent of automotive transportation, and would have housed the first generation of young couples migrating from the farms into the cities. 
     

2010-8-17:  The markets soared today on Bulls wake up, smell coffee and Staking out S&P 500's trading range: Ashbaugh. The NASDAQ Composite hopped 27.57 points (1.26%) to finish at 2,209.44. The Dow skipped 103.84 points (1.01%) to close  at 10,405.85, and the S&P 500 jumped 13.16 points (1.22%) to end at 1,092.54. Oil closed at $75.77 a barrel, while Gold was unchanged at $1,227. The VIX subtracted 1.77 to 24.33.
    My investment advisory service observes that what counts is the bond market (Fed buys $2.55 billion in Treasury bonds, and Treasury yields rise after Fed buys bonds). The bond market would seem to be signaling deflation and recession, while the stock market is anticipating The precipitous fall in bond yields over the past few weeks is cause for pause, and that situation bears watching over at least the next week or two. The two markets are on a collision course.
        
    The article Fed hasn't lost faith in upturn: Kocherlakota quotes the president of the Minneapolis Federal Reserve Bank explaining that the Fed didn't decide to reinvest its mortgage money in Treasury bonds because of concerns about the recovery, but to counter excessive prepayments of mortgage-backed securities that are encouraging homeowners to prepay their mortgage payments at today's ultra-low mortgage rates, pulling down the Fed's principal balances. (The Fed has just lowered its forecast for 2010 GDP growth from 3.2%-to-3.7% to 3.0%-to-3.5%.) Narayana Kocherlakota also states that "Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers." "The problem is a mismatch between firms who have jobs but can't find skilled workers."
    Today's article, China: We're #102, is a follow-on to yesterdays' article, China remains desperately poor. The article says that China now has a per capita income equal to that of the United States in 1932, or between 1/6th and 1/7th that of modern Americans. 
    I remember full well the U. S. standard of living in1932. We lived in an average suburban neighborhood in an average suburban house (shown below). We had one car, and one bath. There was a gas stove,  a gas hot water heater, and a coal-fired furnace.

 There was city bus service at one end of our street. There were street lights and sidewalks. Things weren't much different than they are now, although our level of material wealth is obviously much greater now than it was then. The houses around ours were owned by factory and clerical workers, as opposed to more expensive neighborhoods populated by professional and technical personnel. Virtually none of our neighbors would have had a college degree. So if China has reached this level of abundance they're far removed from the Chinese peasantry of 1910 (just as urban Americans in 1932 were far removed from the pioneers of 1832).
    These two articles, Three dividend ETFs to fight deflation, and Yields on dividend ETFs come with stock-like risks discuss the benefits and risks of dividend-yielding ETFs

2010-8-16:  The markets ended flat today: Modest rebound in Empire State Index for August. The NASDAQ Composite gained 8.04 points (0.39%) to finish at 2,181.87. The Dow shaved off 1.14 points (-0.01%) to close  at 10,302.01, and the S&P 500 inched up 0.13 points (0.01%) to end at 1,079.38. Oil closed at $75.05 a barrel, while Gold rose $10 to $1,227. The VIX subtracted 0.14 to 26.14.
Bond Yields Hit New Lows
    U.S. 10-year yields fall to March 2009 low. Paul Krugman says it well with Permanent Link to Holy Bond Yield, Batman!. Yields on the 10-year Treasury bond closed at 2.59%. (They bottomed at 2% early in 2009.) It was only a few weeks ago that yields on the 10-year Treasury fell below 3%. 
    The yield on 2-year Treasuries is now at ½ %. 
    The yield on 30-year Treasuries closed at 3.74 % after falling below 4% a few weeks ago.. 
    The article explains that the price of 2-year Treasuries has risen 2.07% since the beginning of the year, while the prices of 10-year and 30-year Treasuries have climbed 12.4% and 16.5%, respectively: If Fed opts to buy more Treasurys, it will be a lot. Consequently, bond traders are buying 10-year and 30-year Treasuries for their profit potentials.
    My investment advisory service explains that high-frequency traders have clearly linked bond prices to stock prices in their computerized trading programs. When bond prices go up, stock prices go down. At the same time, it points out that our leading bond trader, Bill Gross of PIMCO, is saying that the dynamics of the bond market don't suggest a double-dip. 
    On the other hand, strategists at CRT Capital Group expect falling yields on longer-term bonds as bond investors lock in yields against the threat of a double-dip recession.
    Tomorrow, the Fed will begin its first purchases of U. S. Treasury bonds.
    Proof of a bond-market bubble  
The Chinese Economy Becomes the World's Second Largest
     Japan eclipsed by Chinese growth and China remains desperately poor. This is an apples-and-oranges comparison. With 1/10th the population of China, Japan would seem to have a per capita level of wealth that's 10 times that of China. However, in terms of real purchasing power, China has about 1/5th the Japanese standard of living. The United States is among the top 10 countries in the world in terms of per capita income, with Japan having fallen to #20, and China at #100, behind Namibia, Algeria, and El Salvador.
Investing in Home Mortgages
    This article, House rules, lists some funds that give modest returns from home mortgages. The best of these, Metwest, has returned 9.7% for the year-to-date.

Sorting Conflicting Stories from the Tower of Babble
    I'm going to try to sort through the contradictory swirl of stories and opinions and come up with some understanding of what's going on. This will have to spelled out piecemeal because of constraints on my time, but here's a fist installment. 
    For the first time since the Great Depression, our traditional (and only) technique for bringing us out of recession, (lowering interest rates) has failed. During the 2002-2003 recession, the Federal Funds Rate rate got down to 1%, and there was talk about how dangerous it would be (" like pushing on a string") if that didn't do the job. But in 2002, 1% was good enough, and: the economy picked back up on its own.
    That didn't happen this time. This time, a 1% Federal Funds Rate didn't even come close to getting the job done. So here we are at the bottom of the Great Recession with our only proven way of lifting us out of recessions having come a cropper. Last year's solution was a one-time stimulus package that was twice as large, as a percentage of GDP, as FDR's largest. (The 2009 fiscal stimulus was $862 billion, or about 6% of the $14.4 trillion, U. S., 2009 GDP.) (On the other hand, FDR's "New Deal" went on for four years, and even four years of the new Deal wasn't enough to put Humpty-Dumpty together again.) That stimulus money kept a Depression at bay while it lasted, and even fueled a mini-turnaround, but now it's largely run out.
Bottom line:  Left to its own devices, I'm led to conclude that the U. S. economy is likely to slip into a double dip, or a deflationary morass. This means (at lest to me) that comparisons with recoveries from other recessions are highly suspect. The restocking of inventory (after an unusually zealous abstention from restocking) and the 2009 fiscal stimulus have run their course, and now, there don't seem to me to be any domestic drivers in the pipeline to keep the economy from lapsing into a recessionary vicious circle.
    OK. So why do so many prognosticators still think that the U. S. economy will grow 3% or so this year? How can that happen?
    I can think of two possible mechanisms that might support such a scenario.
(1)  Although the Fed is limited in what it can do from here, it does have options, and it has signaled that it will use them going forward.
(2)  If 50% of U. S, corporate sales take place outside the U. S., might a global recovery keep U. S. corporations afloat even if domestic sales continue to falter?

2010-8-13:  Stocks fell for the fourth day in a row.  The NASDAQ Composite lost 16.79 points (-0.77%) to finish at 2,173.48. The Dow dropped 16.8 points (-0.16%) to close  at 10,303.15, and the S&P 500 dipped 4.36 points (-0.4%) to end at 1,079.25. Oil closed at $75.57 a barrel, while Gold was unchanged at $1,217. The VIX increased 0.51 to 26.24.
    No-shows are the real market movers now mentions that with three weeks of summer left, and lots of Wall Street types on vacation, and with others nervous about deflation and double-dip risks, it doesn't take much to move the markets.  
    U.S. consumer prices climb 0.3% 
    The core rate of inflation remained at 0.1%. The other 0.2% was caused by rising gas prices. The increase in core CPI over the past year was 0.9%. 
    Fed's 'dangerous gamble'   
    "Thomas Hoenig rips zero-interest-rate regime in perhaps one of the sharpest critiques of Fed policy ever by a sitting policy-committee member."
    Mr. Hoenig's concern is that the Fed is loaning money to "banks" at what amounts to a zero interest rate. Then the banks can invest this "free" money in government bonds, and pocketing the bond income. The Fed is blowing another bubble. Mr. Hoenig believes that the recovery is slow but is on track, and that the financial world is deliberately talking "double-dip" and "deflation" in order to keep interest rates low.
    Treasurys hold gains after retail, inflation data, and Dollar holds gain. The yield on 10-year Treasuries has fallen from 2.82% last week to 2.69% this week.
    Consumer confidence edges up slightly in August from July, "but still remained well below readings this year through June".  
    Consumers take a break. Retail sales rose 0.4% during July, but about 0.2% excluding autos, and that 0.2% went into higher gasoline prices. Retail sales have been dropping 4% a month during May, June, and July.   
       
       
    Euro-zone GDP's 4-yr. best: a 1% rise in quarterly GDP (4% a year). At the same time, the peripheral nations, such as Portugal, Ireland, Italy, Greece and Spain, are still in or are expected to re-enter recession. "Brzeski cautioned against ideas the euro zone is set to convincingly decouple from the U.S. economy. 'The last 40 years have shown that euro-zone decoupling from the U.S. economy has always been an illusion,' he said. 'At best, only the euro zone's current main attraction, the German economy, has the potential to start a period of growth outperformance.'"
    In Europe's lesson for market, the author writes, "And despite Germany's growth in the second quarter, questions remain over how it will continue from here. Industrial giants like Siemens AG /quotes/comstock/13*!si/quotes/nls/si (SI 96.08, +0.27, +0.28%) /quotes/comstock/11e!fsie (DE:SIE 75.21, -0.25, -0.33%) and BASF /quotes/comstock/11e!fbas (DE:BAS 44.10, -0.20, -0.45%) /quotes/comstock/11i!basfy (BASFY 55.75, -1.34, -2.35%) have to export to somewhere, and even Chinese growth is slowing, to say nothing of American. As for the laggards, they are still in trouble. The cost of Irish debt has jumped over the past week. Greek restructuring is still a possibility. Spanish unemployment has grown to a staggering 20%." 
    Talking with David Rosenberg (video) offers interesting perspectives. Mr. Rosenberg was formerly the Chief Economist at Merrill Lynch. He has a bearish forecast for the economy. He thinks we should declare war on unemployment. With a federal 2010 deficit that is 10% of GDP, and a national debt-to-GDP ratio that's approaching 1.0, he thinks that we need to be quite careful how stimulus money is targeted. He suggests tax breaks aimed at small businesses. But job creation should be paramount. If jobs can be created, consumer spending will follow, and the economy will heal. Like Paul Krugman, he emphasizes that the situation we're in is unprecedented, not just since World War II. He thinks this current quarter will be flat, and the 4th quarter could well see negative GDP growth again... i. e., a recession. He also points out that we still haven't officially been declared out of the current recession. (He thinks the odds of a double-dip recession are well above 50%. He recommends investing in dividend-yielding companies, and in gold.) 
    For what it's worth, the Conference Board Forecast rules out double-dip recession (written 8/3/2010): 
    "The Conference Board projects North America’s economic growth this year at 3%, noting that the chance of U.S. seeing a double-dip recession are 'minimal.' Read more: http://www.financialpost.com/news/Forecast+rules+double+recession/3354946/story.html#ixzz0wXsVwK6l"

2010-8-12:  Stocks fell again today on a disappointing weekly jobless claims report: U.S. initial weekly jobless claims rise to 484,000, (but note that part of this increase is due to the extension of jobless benefits to 99 weeks in the hardest-hit states). The NASDAQ Composite lost 18.36 points (-0.83%) to finish at 2,190.27. The Dow dropped 58.88 points (-0.57%) to close  at 10,319.95, and the S&P 500 dipped 5.86 points (-0.54%) to end at 1,083.61. Oil closed at $75.86 a barrel, while Gold ratcheted up to $1,217. The VIX increased 0.3 to 25.69.
    My investment advisory service noted that after an initial plunge, the dip buyers moved back in. My advisory service thinks this is another excursion within a range-bound market rather than a "game-changer".
    The chorus of columnists sounding Paul Krugman's theme is swelling mightily lately: Gold rises as world spirals toward deflation. Still, not everyone believes in government intervention: Let the debt subside. Many still subscribe to the Little Bo Peep guidance: "Leave them alone and they'll come home, wagging their tails behind them."    
    Paul Krugman has pointed to Ireland as an example of a country that went down the austerity path several years ago. He argues that austerity hasn't helped them much. 
    Read story on ECB buying Irish bonds to calm volatility.
    "Ireland has been the poster child for many optimists convinced that if a country has the necessary discipline and appetite then it can address major problems itself," said Jim Reid, strategist at Deutsche Bank. "While this may still be the case, there seems to be increasing headline risks from an economy that was a very early mover in terms of austerity." Read archived story on concerns about Ireland.
    Fixed mortgage rates hit new lows  
    RealtyTrac: No foreclosure peak until 2011  
    Stock futures are mixed, but are basically down tonight.

2010-8-11:  What a day! perhaps the best thing you can say about today's market action is that although the markets tanked, they didn't break below their recent trading ranges in the face of some pretty glum news. The NASDAQ Composite parted with 68.54 points (-3.01%) to finish at 2,208.63. The Dow plunged 265.42 points (-2.49%) to close  at 10,378.03, and the S&P 500 exfoliated  31.59 points (-2.82%) to end at 1,089.47. Oil closed at $77.55 a barrel, while Gold ratcheted up to $1,207. The VIX increased 2.97 to 25.34.
    Stock market futures are down roughly ½ % tonight.
    Analysis: Fast-fading recovery now looks even weaker
    Paul Krugman has posted quite a bit today.
    In Paul Farrell's article, Reagan insider: GOP destroyed economy, Mr. Farrell quotes former Reagan budget director David Stockman as he takes on his (Republican) party for an alleged transition from the Republican principles of 40 years ago to their virtual antitheses today. Mr. Stockman cites four deformations of the national economy. 
Stage 1. Nixon irresponsible, dumps gold, U.S starts spending binge
    The first deformation happened when Milton Friedman persuaded President Nixon to go off the gold standard:
    "So for the past 40 years, America's been living 'beyond our means as a nation' on 'borrowed prosperity on an epic scale ... an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves.'
    "Remember Friedman: 'Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.' Friedman was wrong by trillions. And unfortunately 'once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.'"
Stage 2. Crushing debts from domestic excesses, war mongering
    The second deformation (according to Mr. Stockman) was "the extraordinary growth of our public debt."
    "Back 'in 1981, traditional Republicans supported tax cuts,' but Stockman makes clear, they had to be 'matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment.' The Reagan administration's hastily prepared fiscal blueprint, however, was no match for the primordial forces -- the welfare state and the warfare state -- that drive the federal spending machine.'
    (Former Fed Chairman Alan Greenspan has just stated his opposition to extending the Bush tax cuts, saying that although he supports tax cuts in general, he doesn't support paying for them with borrowed money. He also repeats that he supported the original Bush tax cuts with the proviso that they be accompanied by corresponding spending cuts, but that didn't happen.)
    "Yes, the GOP does have a welfare-warfare state: Stockman says 'the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending, exempted from the knife most of the domestic budget -- entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans' fiscal religion.'
    "But then 'the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.' By 2009, they 'reduced federal revenues to 15% of gross domestic product,' lowest since the 1940s. Still today they're irrationally demanding an extension of those 'unaffordable Bush tax cuts [that] would amount to a bankruptcy filing.'
Stage 3. Wall Street's deadly 'vast, unproductive expansion'
    "Stockman continues pounding away: 'The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector.' He warns that 'Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation.' Wrong, not oblivious. Self-interested Republican loyalists like Paulson, Bernanke and Geithner knew exactly what they were doing.
    "They wanted the economy, markets and the government to be under the absolute control of Wall Street's too-greedy-to-fail banks. They conned Congress and the Fed into bailing out an estimated $23.7 trillion debt. Worse, they have since destroyed meaningful financial reforms. So Wall Street is now back to business as usual blowing another bigger bubble/bust cycle that will culminate in the coming 'American Apocalypse.'
    "Stockman refers to Wall Street's surviving banks as 'wards of the state.' Wrong, the opposite is true. Wall Street now controls Washington, and its 'unproductive' trading is 'extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives.' Wall Street banks like Goldman were virtually bankrupt, would have never survived without government-guaranteed deposits and 'virtually free money from the Fed's discount window to cover their bad bets.'"
Stage 4. New American Revolution class-warfare coming soon
    "Finally, thanks to Republican policies that let us 'live beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore,' while at home 'high-value jobs in goods production ... trade, transportation, information technology and the professions shrunk by 12% to 68 million from 77 million.'
    "As the apocalypse draws near, Stockman sees a class-rebellion, a new revolution, a war against greed and the wealthy. Soon. The trigger will be the growing gap between economic classes: No wonder 'that during the last bubble (from 2002 to 2006) the top 1% of Americans -- paid mainly from the Wall Street casino -- received two-thirds of the gain in national income, while the bottom 90% -- mainly dependent on Main Street's shrinking economy -- got only 12%. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy.'"
Warning: this black swan won't be pretty, will shock, soon
    "His bottom line: 'The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing.'"
    Paul Farrell's bottom line: ..."a historic class war. So be prepared, it will hit soon, when you least expect."

    I don't believe that Paul Farrell or David Stockman mean to say that the Democrats are better than the Republicans. Rather, they're saying that the Republican platform no longer embraces the fiscal prudence that characterized it 40 years ago.

    Today, Mr. Stockman has warned again about the deficit: Runaway train.

    Obama insiders out of touch on U.S. economy

2010-8-11 (Afternoon):  Had a dental appointment this morning.
    Global equity markets are off sharply today: Growth fears grip the globe, .Shiller on double-dip risk: It's now even money, and GDP revision: Look out below!
    Noted Yale economist Robert Schiller has just upped the odds of a double-dip recession above 50-50, and states that the Fed may not have the power to stop it. He's calling for a jobs-creation stimulus package. At the same time, it's being announced today that the second-quarter GDP figure, which yesterday's article, Wholesale data to deflate Q2 GDP, economists, suggests may have to be lowered from 2.4% to 2.0%, is now tipped at 1.3%!
    Like Robert Schiller, MarketWatch columnist Rex Nutting is singing Paul Krugman's song about a Washington that's fiddling while Rome burns: Fed can't do much more to avoid a double dip.
    The Obama Administration can't actually stimulate the economy between now and the November election, even if in doing so, they wouldn't face a firestorm of public protest. So the Democrats are forced to try to jawbone the public into thinking that the economy is recovering, albeit a little slower than had been forecast. 
    My investment advisory service is treating this as though it's a range-bound fluctuation that's taking the markets to the bottoms of their ranges... unless it's a game-changer, in which case, the markets could continue to fall.

2010-8-10:  The markets sold off a bit today. The NASDAQ Composite shed 28.52 points (-1.24%) to finish at 2,277.17. The Dow lost 54.5 points (-0.51%) to close  at 10,644.25, and the S&P 500 exfoliated  6.73 points (-0.6%) to end at 1,121.06. Oil closed at $80.23 a barrel, while Gold ratcheted up to $1,207 The VIX increased 0.23 to 22.37. 
    Today's action was all about the FOMC (Federal Open market Committee): Fed: Economy needs help: 
"The Federal Open Market Committee announced it would reinvest the proceeds of its investments in mortgage-backed securities as they mature into Treasurys. By reinvesting the principal, the Fed prevents its balance sheet from shrinking, but the move does little to provide new financing to the economy. See full story on the FOMC meeting. 

"As economic stimulus goes, this is pretty thin gruel.

"But the psychological impact is powerful. It signals that the Fed won't raise rates anytime soon and is in fact willing to do more to support growth as the economy slowly crawls out of the worst spot it's been in for a long time."

The author continues:

"What has the Fed accomplished? It avoided a second Great Depression, but large sectors of the economy are still struggling. It's not clear what easier credit conditions can do to ease that suffering."

For a chuckle, try this: How to read a Fed statement.

    I was ready to conclude that the fact that the Fed doesn't intend to do more than it does implies that the FOMC can and will insure that this recovery continues: Danielson: Fed showing investors it's on the job. However, my investment advisory service is a little more cautious tonight than I would have expected. For one thing, the yield on 10-year Treasuries, after closing at a new low of 2.83% last week, hit another new low of 2.78% today. Also, Treasury sells 3-year debt at lowest yield ever .For another, the Fed's predictions for 2010 and 2011 are expected to be revised lower. Of course, that's still a long way from zero, but we're talking about inflationary expectations for the next 10 years. Meanwhile, Minyanville's Matt Theal is telling us that the Smart money bets on inflation. Can you imagine! Those silly bond traders haven't a clue that inflation is getting ready to explode! 
    Paul Krugman's reaction to today's Fed announcement is that "The Fed’s current policy is grossly inadequate, logically bizarre, and slightly — but only slightly — encouraging." 

Families dig deep
    This article is shocking! It places the 2009-to-2010 rise in college costs at 20%-to-30%! Todd Harrison's predictions of social acrimony may bear fruit.

  The jobless recovery won't go further without jobs:  

    This article notes that productivity gains peaked in the spring of 2009, and have since fallen, as employers squeezed all they could out of their existing workforces. Going forward, the only way that productivity can increase is by hiring additional employees.  
    Meanwhile, Marketwatch columnist Brett Arends marvels at the lack of stock market response to the growing ranks of the unemployed and underemployed:   
Jobless alarms fall on deaf ears of investors.  
    Wholesale data to deflate Q2 GDP, economists says that second-quarter GDP growth will probably have to be adjusted downward from 2.4% to 2.0%. The company's estimate of 2.4% growth for the current quarter will probably also have to be lowered to 2.0%.   
    In Killing geese that lay golden eggs, Dr. Irwin Kellner is concerned that repealing the Bush tax cuts at the end of this year could havge a chilling effect upon an already weakened economy,
   In Reagan insider: GOP destroyed economy, Paul Farrell quotes former Reagan Budget Director David Stockman. As discussed in the archives (July 7-9, 2010), Mr. Stockman believes that the Great Depression and the current Great Recession were brought on by too much debt, and that the only workable antidote is letting well enough alone until the economy somehow eliminates its debt load. (The Great Depression spawned Adolph Hitler and led on to World War II. Are we willing to risk another psychopathic dictator, and an all-out nuclear exchange?) 
    I feel that Mr. Stockman makes some interesting remarks in his article.
    Michael Ashbaugh observes that the trend is shaky but is still up: S&P 500 has a tenuous hold: Ashbaugh.   
    Market futures are down significantly tonight.

2010-8-9:  The markets rose a bit today, battling with overhead resistance. The NASDAQ Composite added 17.22 points (0.75%) to finish at 2,305.69. The Dow gained 45.19 points (0.42%) to close  at 10,698.75, and the S&P 500 appreciated  6.15 points (0.55%) to end at 1,127.79. Oil closed at $81.45 a barrel, while Gold ratcheted up to $1,203 The VIX increased 0.4 to 22.14. 
    This first article, The promise of quantitative easing, written by Todd Harrison, puts forth the idea that the S&P is heading for, e. g., 860. Additional quantitative easing might drug the markets a little longer, but they'll soon tank. Also, he's concerned about how the Wall Street game is changing, along with new financial regulations. He mentions major players who are withdrawing from the financial markets until they stabilize.
    The second article, Consumers: Soon to feed through, talks about rising food prices at the same time that wages are falling.
    The third article, Beware the deflationary mindset, warns that all this talk about deflation is setting up deflationary expectations.
    The fourth article, Significant chance of recession next 2 years: SF Fed, is suggesting the probability of a renewed depression in 2012.
    Stock market futures are down a bit tonight.  

2010-8-7 (Saturday):  Like 10-year and 30-year Treasuries, the yield on 2-year Treasuries also closed on Friday at a new low (0.51%). Treasury yields are a function of interest rate expectations and of "flights to safety". Right now, with European sovereign debt no longer dominating the news, "flights to safety" wouldn't seem to me to be driving interest rates lower, which leaves interest rate expectations as the presumed motivator for continuing interest rate declines. 
    Most money managers seem to be anticipating a period of slow but steady growth in the economy, and modest inflation rather than a double-dip recession and/or deflation: Economy awaits fresh boost after summer slumber. This slow, steady-growth scenario is on the other side of the crystal ball from Paul Krugman's predictions.
    We'll see.
    Looking ahead, with a stellar earnings season (compared with the dismal performances a year ago) behind us, it's going to take something besides earnings to boost the markets for the rest of this month. My investment advisory service, which adjusts its strategy day-by-day and week-by-week, has a moderate "buy" signal going into the upcoming week.

2010-8-6:  The markets fell a little more today on another disappointing jobs report: U.S. sheds 131,000 jobs, 71,000 more [private sector] jobs not enough to dent unemployment rate, and Millions have simply given up. The U. S. needs to add between 100,000 and 125,000 new jobs a month to keep up with population growth. The total unemployment rate didn't rise, but only because so many people have given up, or have run out of unemployment compensation benefits. Not all economists are pessimistic:2 Top Economists Differ Sharply on Risk of Deflation. However, the yield on 10-year Treasury bonds, which fell below 3% a few weeks ago, closed today at 2.83%:  Treasury yields touch lows. (Of course, Treasury-bond yields are a function of supply-and-demand, and can change quickly.)
    A chilling picture of what long-term deflation and stagnation can do is afforded in this article: Japan's Economic Stagnation is Creating a Nation of Lost Youths.
    The only upbeat news today comes from mark Hulbert who observes that the third year in a presidential cycle is always an up year (but it's important to remember that many or most of these "always" rules are based upon the past 60 years of Fed-controlled recessions).

2010-8-5:  The markets fell a little today on disappointing weekly job claims and a tepid retail sales ahead of tomorrow's key employment report: Stocks register displeasure. The NASDAQ Composite parted with 10.51 points (-0.46%) to finish at 2,293.06. The Dow declined 5.45 points (-0.05%) to close  at 10,674.98, and the S&P 500 shaved off 1.43 points (-0.13%) to end at 1,125.81. Oil closed at $82.41 a barrel, while Gold ratcheted up to $1,198 The VIX dipped 0.11 to 22.10. 
    My investment advisory service believes that there's still air left in this rally's tires.
    30-year fixed-rate mortgage lowest since 1971 is consistent with the possibility of  deflation, and Treasurys up; jobless claims increase concerns notes that: 
    "Expectations of further quantitative easing have supported both the bond and equity markets. But this isn't likely to last forever. Either bonds will be proved right on deflation and equities will sell off or equities will be proved right about a better economic environment and bonds will be hit hard."  
    Market futures are neutral tonight ahead of tomorrow's payrolls data: Mostly bad news tipped for jobs data

2010-8-4:  The markets rose more today than they fell yesterday.  The NASDAQ Composite hopped 20.05 points (0.88%) to finish at 2,303.57. The Dow skipped up 44.05 points (0.41%) to close  at 10,680.43, and the S&P 500 jumped 6.78 points (0.61%) to end at 1,127.24, putting it nicely above its 1,120 resistance level. Oil aclosed at $82.41 a barrel, while Gold ratcheted up to $1,198 The VIX rose 0.42 to 22.21.  
    Could the wild card in the current financial imbroglio be the Fed? The moves that the Fed could make are allegedly expensive and unproven. The Fed wouldn't seem to me to have a politician's incentives for political spin. Ben Bernanke has recently been confirmed for another term as Fed Chairman. At the same time, Chairman Bernanke has recently gone on record predicting a 3%-to-3.5% growth in U. S. GDP for 2010 and a 4.0%-to-4.5% growth in U. S. GDP in 2011.Is he right?  It seems impressive to me that the markets, which look 6 to 9 months ahead, haven't plunged, and in fact, have broken out of their recent trading ranges and are headed back up. It's also the case that there's a lot of bearish sentiment about the outlook for the future.
     Stock market futures are down slightly tonight.

2010-8-3:  The markets retrenched a tad after yesterday's 2% run-up: Stocks rally chilled by economic jitters. The NASDAQ Composite dropped 11.84 points (-0.52%) to finish at 2,283.52. The Dow dipped 38 points (-0.36%) to close  at 10,636.38, and the S&P 500 deflated 5.4 points (-0.48%) to end at 1,120.46, putting it right at its resistance level. Oil advanced to $82.34 a barrel, while Gold exuented stage left at $1,188 The VIX rose 0.62 to 22.62.
    Market Medics: Why bonds tell a better story summarizes the conflicting stories that the stock market and the bond market are telling. Stocks (says the article) have risen on the backs of global government spending. Now, though, not only is that global government stimulus running out, but in addition, many governments (including the Chinese and the Australian governments) are tightening to head off potential inflation. This fiscal austerity, by placating the postulated "bond vigilantes", was supposed to elevate interest rates on bonds. Instead, interest rates on two-year Treasuries have dropped dramatically since April, tilting toward deflation.
    This article sounds the Krugman theme that a double-dip recession, or at least deflation, may be coming, after all.
    In this blog: Permanent Link to Why Is Deflation Bad-, Dr. Krugman explains why deflation isn't a good idea. But for a quick-and-dirty glimpse of this, take a look at Japan's two "Lost Decades".
    Michael Ashbaugh's weekly technical column notes that the major indices have cleared their resistance levels, but they've done so on unusually light volume, raising questions about how meaningful these breakouts have been: S&P 500 clears resistance without volume.  
     Irwin Kellner continues to forecast a grim denouément to the current stock market story in Politics threatens economic recovery, as does MarketWatch' Wall Street columnist David Weidner: Market's rise is a rally without a cause. Of course, stock markets climb "walls of worry", but as I've said a time or three, this time really is different. This time, for the first time since The Great Depression, the Fed is out of conventional ammunition.
    Market futures are neutral this evening.

2010-8-3 (Late Afternoon):  My investment advisory service terms this a "news-driven environment". Today's news is pointing toward deflation, with downward revisions to past personal incomes and to prior values for the consumer price index: Income, spending standstill. This article, Orders to U.S. Factories Decrease More Than Estimated in Sign of Cooling, has just appeared.)
    Paul Krugman published this commentary, Permanent Link to Always Look On The Bright Side, this morning critiquing Treasury Secretary Geithner's article: Welcome to the Recovery. Secretary Geithner is... wait for it!... optimistic about the continuing recovery. Paul Krugman is taking him to task for knowingly dissembling the facts about the economy: that the stimulus package was a couple of sizes too small, and that the Republicans are blocking attempts to provide the additional stimulus needed to bring the economy out of the pits. But my personal take is that the Democrats have decided to fall back and punt. The midterm elections are three months away. I suspect that party strategists have decided that it would be political suicide to admit now that President Obama didn't ask for a large enough stimulus last year, and to blame Republicans for blocking further stimulus infusions. Democratic Party strategists might be thinking that the best the administration can hope for right now is to proclaim victory and to hope that the economy doesn't turn into a shambles between now and November... which means that further administration steps to invigorate the economy may be off the table for the next three months. In that vein, I suspect that Treasury Secretary Geithner is trying to buy some time: Geithner Says U.S. Unemployment May Rise Again Before Declining.
    David Weidner writes: Market's rise is a rally without a cause, and Mark Hulbert observes: Wall of worry weaker after big rally.

2010-8-2:  " ...and the dish ran away with the spoon." The stock market jumped about 2% today: An august day for stocks.  The NASDAQ Composite gained 40.66 points (1.8%) to finish at 2,295.36. The Dow lost 208.44 points (1.99%) to close  at 10,674.38, and the S&P 500 rose 24.26 points (2.2%) to end at 1,125.86. Oil vaulted to $81.46 a barrel, while Gold rode into the sunset at $1,184 The VIX fell 1.49 to 22.01.
    Why did the equity markets soar today? Because I was pessimistic this morning about their prospects. Works every time (except when it doesn't).
    This first article, Big Investors Fear Inflation, cited by Paul Krugman, says,
Some of the world's leading investors are becoming more worried about deflation and are re-shaping their portfolios to prepare for a possible period of falling prices.

"Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for a possible bout of deflation, a development that could cripple global economies and world stock markets.

"The investors cite weak economic figures and a mounting consensus that global policy makers are reluctant, or unable, to take further steps to boost economic growth as reasons for their market positions.

"'Deflation isn't just a topic of intellectual curiosity, it's happening," says Mr. Gross, who runs the $239 billion mutual fund Pimco Total Return Fund, citing an annualized 0.1% decline over the past two years in the U.S. consumer-price index. "It's an uncertain world that's tipping toward deflation.'"

    The second article, Bernanke to U.S. states: Sock it away, quotes Dr. Ben Bernanke saying that "consumer spending is set to sustain the economic recovery." Given that Dr. Bernanke's position is apolitical--he was appointed by the Bush Administration,--his assessment is backed by the weight of his reputation.
    The third article, Double-dip fears overblown?, observes that if the private hiring component of Friday's payroll number is positive, then it means the economy is still expanding.
    My investment advisory service has concluded that today's action indicates that we're not heading for a double-dip recession.  
    Stock market futures are slightly lower tonight.  

2010-8-1:  The articles below tell an interesting story. 
    The first article, A Sin and a Shame, written by the New York Times' Bob Herbert, explains that corporate managements have used The Great Recession as an excuse to squeeze their workforce to get more and more out of them. This is why corporations are sitting on piles of cash. But I suspect that this is an object lesson in why, even with all its warts, government intervention is essential. If one corporation improves its bottom line by transferring more of its operations overseas, its competitors have to fall in line or fall behind. For the economy as a whole, this is bad because it reduces the number of employed consumers who have the money to buy the corporation's products. But individual corporations have to maximize their own profits, and leave it to someone else to regulate the system: U.S. job growth still lagging.
    The second article, The closer you look at the GDP report, the uglier it gets, points out that consumer spending rose at a slow, and slowing (throughout the quarter) pace during the second quarter. Furthermore, the principal contributors to GDP growth were inventory replacement, fiscal stimulus, and residential  investment as homebuyers hurried to take advantage of the homebuyers tax credit. In this current quarter, fiscal stimulus is no longer present, and state and local governments which, thanks to federal stimulus money, were slightly positive during the first half of 2010, are cutting back sharply now that the federal stimulus money is no longer there. Here are three more articles in the same vein: Steep decline in GDP growth raises alarms, What Today's GDP Report Says, and Double-dip feared as US economic growth loses pace.
    On the other hand, this article, Needed: Better GDP Growth, in Barron's, argues that what we're seeing is typical in this stage of a recovery. This article is no longer available without a subscription to Barron's, but here's the part that is available:

"'THE GDP REPORT MAY EASE some fears that the U.S. is heading for a double-dip recession….But it also confirms widespread concerns about a sharp economic slowdown,' commented The Wall Street Journal.

"That news item could have been responding to Friday's report on GDP growth in this year's second quarter. But it actually appeared in early February 2003. Widespread concerns about an economic slowdown seemed even more warranted at the time, because growth in gross domestic product had been running much slower. We know now that the sharp economic slowdown then expected turned out to be a sharp acceleration by the ... "

    I'm thinking that a highly important fact is buried in this article. It sounds to me as though the author, Gene Epstein... and by extension, Barron's, and perhaps, other fountainheads of financial interpretation such as Marketwatch and the Wall Street Journal... have forgotten to mention that  this recession differs not only in degree but in kind from any previous recession since World War II. Last year, the Fed fired its last conventional bullet against the bear, and it didn't stop the bear. (In fact, it hardly seemed to slow the bear.) This means that comparisons with previous post-WWII recessions may not be applicable. We're up against what Paul Krugman dubs the "zero lower bound". I remember well the news in early 2003. There was talk about the danger that Alan Greenspan's Fed couldn't rekindle the economy... about "pushing on a string". The question then was, as it is now, whether interest rates could be lowered far enough to revive the economy. Dr. Greenspan's Fed found it necessary to lower the Fed funds target rate to 1% and to hold it at that level for over a year. (Dr. Greenspan has been roundly criticized for holding the overnight  lending rate so low for so long, and that criticism may be well justified, but I remember the angst over whether or not he would be able to re-ignite the economy. And we now know that for all practical purposes, a 1% interest rate is about the equivalent of 0%.) 
    Of course, once "Uncle Alan" lowered interest rates, the economy rose sharply. But this time, we can't depend upon "Uncle Ben" to pull our chestnuts out of the fire. He's already tried and it didn't work.
    This isn't to criticize Gene Epstein or Barron's for comparing this recession with previous recessions. I didn't twig to this caveat when I first read Mr. Epstein's article. I should have recognized the problem the minute I read the article, but it wasn't until a few hours later that I realized that we can't compare what's happening now with what's happened in previous post-WWII recessions.
    To summarize: 
(1)  In 2003, in the midst of a recession that was milder than the current "Great Recession", the Fed fired its last conventional bullet at the bear and it worked ("bearly"?) This time, it didn't. 
(2)  Many of the prognostications being issued for the economy going forward are probably based upon the prior experiences of the prognosticators, virtually all of which is based upon Fed-controlled recessions since World War II. 
    The Barron's article is suggesting a second-half pace of GDP growth of 3.2%. It also states that a double dip seems increasingly improbable. And finally, it observes that if second-half growth is closer to 1.6% we may expect to see a rise in unemployment to, e. g., to 9.8%.
"Conventional" Fed Tools
    I'm mentioning "conventional" Fed tools because the Fed still has some (costly and untried) unconventional tools available to it which it hasn't yet chosen to try.
Bottom Line: 
    Appealing to what's happened in past recessions to chart the course of this recession doesn't appear to me to be a winning strategy. 
    There will be one more week of heavy earnings reporting and then the second-quarter earnings season will be winding down. 

    For the coming weeks,
    U.S. stock market to continue balancing act,  
    Investor sentiment rises, and  
    Emerging markets, on healing path, climb in July   
    My investment advisory service explains that the reason the markets haven't rallied on our excellent corporate earnings may be 
(1) that they're anticipating the situation 6 to 9 months out when the major gains will already be behind us, and
(2) that traders may be uncertain about the macroeconomic outlook.  

2010-7-30:  The markets ended today about where they started. The NASDAQ Composite gained 3.01 points (0.13%) to finish at 2,254.70. The Dow lost 1.22 points (-0.01%) to close  at 10,465.94, and the S&P 500 rose 0.07 points (0.01%) to end at 1,101.60. Oil ended at $77.96 a barrel, while Gold said goodbye at $1,180 The VIX fell 0.63 to 23.60.
    While the chart below shows a steady decline, that's only because the first-quarter GDP was revised upward to 3.7%. If that can happen to first-quarter GDP in the third quarter, why can't it also happen to second-quarter GDP in the fourth quarter? If second-quarter GDP were revised upward in October from today's 2.4% to 3.4%, suddenly, the chart below would show a flattening-out, consistent with a recovering economy..
   
2010-7-30 (Morning):  Dr. Kellner missed the call today. Second-quarter GDP came in at 2.4%, or very close to the 2.5% that had been forecast for it. Also, the Chicago Purchasing Managers' Index was a little better than expected, and consumer confidence, while down for July from June's anomalously high reading, was better than expected. Nevertheless, there was initial consternation because the first quarter's GDP was revised up to 3.7% from 2.7%, leading to the chart shown below.

    This chart suggests a steady decline, projecting a negative GDP for the fourth quarter. However, these numbers are so subject to revision that such apparent trends aren't entirely convincing, and the stock markets are recovering.

2010-7-29:  Stocks ended the day down a little, but not drastically lower: Stocks end red, off lows. the NASDAQ Composite down 12.87 points (-0.57%) to finish at 2,251.69. The Dow lost 30.72 points (-0.29%) to close  at 10,467.16, and the S&P 500 fell 4.6 points (-0.42%) to end at 1,101.53. Oil ended at $78.28 a barrel, while Gold ended at $1,169 The VIX closed at 24.13.
    "The U.S. is closer to a Japanese-style outcome today than at any time in recent history," said James Bullard, the president of the St. Louis Federal Reserve Bank, in a research paper: Bullard says U.S. close to Japan-style deflation. What got everyone's attention today is the fact that James Bullard has been a deficit hawk, calling for fighting inflation by raising interest rates. Other Fed players such as Charles Plosser and John Williams (Fed's Williams sees bump, not swerve, in recovery) are still deficit hawks, and are vocal in belittling the chances of deflation. But as explained in Monetary policy, the majority of voting members of the Fed, including John Williams boss, Janet Yellen, are worried about deflation, and when the Fed meets again week after next, might possibly announce plans for "Quantitative Easing". Or the Fed may choose to wait longer to see whether or not deflation is in the cards. As shown below, inflation is currently quite low, but it's still north of zero.

    Economist Gary Schilling is also predicting deflation: Gary Shilling: Investing Advice for a Deflationary Economy.
    For an alternative perspective: Why Deflation Fears Are Overblown.  
    In the meantime, I'm waiting to see what will happen with tomorrow's GDP number: Recovery is spelled G-D-P. 
    Stock market futures are down a little tonight.  
      
2010-7-29 (Noon):  After rising 1% on opening, stock indices fell about 2% from their peaks this morning: U.S. stocks fall on reports of Fed deflation talk, What to believe? bonds or equities (video)? and disappointing results for a few staples stocks. The first article refers to the fact that the Federal Reserve's president, James Bullard, reiterated that the Fed might need to buy Treasury bonds, etc., if deflation continued to threaten. (This is like your three-year-old saying, out of the blue, "Everything's all right. There's nothing wrong. I'm just fine.") The second article says, that the bond market is signaling deflation, while the stock market is pointing toward a subdued but continuing recovery. In the past, the bond market has usually had better predictive value because it was populated with professional traders, but by now, retail investors have fled the equity markets, leaving them also dominated by professionals.  
    The unemployment number was 457,000 this morning compared to 464,000 last month, and Irwin Kellner's forecast  of 460,000. (His forecast for tomorrow's 2nd-quarter GDP is a 2.0% bombshell compared to the consensus forecast of  2.5%.)

2010-7-28:  The markets ended the day lower, with the NASDAQ Composite down 23.69 points (-1.04%) to finish at 2,264.56. The Dow lost 39.61 points (-0.38%) to close  at 10,497.88, and the S&P 500 fell 7.72 points (-0.69%) to end at 1,106.12. Oil ended at $76.77 a barrel, while Gold ended at $1,166 The VIX closed up at 24.26.
    Sam Stovall repeats his warnings about August and September as "down" months, and advises using them to buy stocks for the year-end rally: Stovall: Work on strategy, not your tan.
    Kleintop: It's a soft spot, not a trend echoes the ideas in Investor, Be Nimble. This latter article observes that corporate CEOs are much more confidant than is the average consumer, and that the mood among CEOs is a leading indicator, whereas the consumer confidence level is a lagging indicator. The latter article also points out that emerging markets are climbing rapidly.

2010-7-28 (Early Afternoon):  In Earnings offer little clue to the future, Dr. Kellner presents a table giving his forecasts for this week's economic numbers. So far, they've held up tolerably well. For Monday, he predicted home sales up about 7%; they were actually up 23%. For Tuesday, he predicted consumer confidence at 50%; it was actually (and disappointingly) 50.1% rather than the widely expected 52%. For Wednesday, he predicted that durable goods orders would be up 0% vs. an expectation of +0.1%; they were actually down 0.1% (i. e., -0.1%). For Thursday, he expects jobless claims to be about the same as they were last quarter. For Friday, he anticipates 2nd quarter GDP growth to be 2.0% versus the consensus projection of 2.5%. (I suspect that a 2nd-quarter growth rate of 2.0%, if it should happen, would be a bombshell for the marketplace.) He also estimates the Chicago Purchasing Managers' Index down 1.6%  to 57.5% from the first quarter's level of 59.1%.
    So far, my investment advisory service considers today's tug-of-war to be expected, with dip buyers moving in to keep the indices from falling very far.
    This article, Market may break out of range with a sledgehammer, argues that the markets are holding up well in the presence of disappointments, and that it maysoon  break up to large gains.
    This article, Investor, Be Nimble, posits that corporate CEOs are bullish regarding the economy, and that now is the time to be positioned for a continuing recovery.  
    This article, U.S. stock market lingers lower after Fed report, advises that the Fed is less optimistic about the economy than it was in June, with growth stalled out in some areas of the country: Growth slows, stalls in some regions: Beige Book.

2010-7-27:  The markets ended the day in neutral (Street battles to keep gains), with the NASDAQ Composite down 8.18 points (-0.36%) to finish at 2,288.25. The Dow gained 12.26 points (0.12%) to close  at 10,537.69, and the S&P 500 slipped 1.17 points (-0.1%) to end at 1,113.84. Oil ended at $77.55 a barrel, while Gold closed down at $1,164 The VIX closed at 23.19.
    In Nasdaq, Dow show signs of a bullish shift, Michael Ashbaugh suggests that now that the NASDAQ and Dow indices have closed above their 200-day moving averages, they are looking more bullish. 
    Irwin Kellner notes that Earnings offer little clue to the future, The excellent earnings being reported in July reflect information that is "already four months old and trends that are even older". He's standing by his prediction that there will probably be another down leg in this recession. This outlook is consistent with tonight's article: Consumer confidence dips.
    On the positive side: Revolution Investing: Fear not (video) and Stovall: History's on our side, but not until November. (August and September are the two worst months for the stock market in the year.)
    Market futures are slightly lower tonight.

2010-7-26:  The markets rose again today. The NASDAQ Composite added 26.96 points (1.19%) to finish at 2,296.43. The Dow gained 100.81 points (0.97%) to close  at 10,525.43, and the S&P 500 regained 12.35 points (1.12%) to end at 1,115.01. Oil ended at $79.05 a barrel, while Gold closed down at $1,187. The VIX fell 1.12 to 23.51.
    The most important piece of news today may be the fact that my investment advisory service advises that the correction that began in April is fading. They're maintaining and re-emphasizing their "buy" signal. Meanwhile, Second quarter gets no respect.
    This article about BP CEO Tony Hayward is significant primarily in terms of what the author says about U. S. executive compensation: Hayward likely wanted this all along: Arends.

2010-7-25 (Sunday Night):  U.S. economy seeing gradual recovery: Geithner, and Watch Geithner on Meet the Press, and U.S. stocks upbeat on earnings, cautious on data.   
    In discussing whether or not the recovery is still with us, we might want to note that in order to have a correction, professional money managers must be convinced that the economy and the markets are going to tank. Similarly, to generate rising markets,  the pros have to be convinced that things are going to improve from here. However, it had been anticipated that the economy would slow down once the stimulus effects ran out and the restocking of inventory was complete. A retrenchment of expectations should have come as no surprise.
    Stocks have moved above their 50-day (intermediate-term) moving averages, but their 200-day (long-term) MA's are still moving down. The 200-day moving average for the S&P 500 lies at about 1,120, or about 18 points above where it closed last Friday.
    As this article shows, Market will 'drift for the rest of summer', more than ¾-ths of the S&P 500companies that have reported in so far have topped earnings estimates, and ⅔-rds have beaten revenue expectations. However, three companies have lowered third quarter estimates for every one that has raised them. (The end of this coming week should give a better picture of what second-quarter earnings have been.) Of course, second-quarter earnings are a reflection of the past, including the effects of the fiscal stimulus and the restocking of inventories. Third-quarter earnings should reflect a more-normal set of conditions.
    Then there's this: Stocks on brink of breakout. And Treasury Secretary Geithner is saying, No new recession, let tax cuts die: Geithner. Of course, Secretary Geithner had better convince the public that the recovery is on track or the Democrats will be toast in November.
    This article, With Stocks, It's Not the Economy, makes the interesting case that because of globalization, the S&P 500 companies now derive about ½ of their  revenues from outside the United States. Consequently, the domestic economy is no longer tied to the stock markets the way it was in the past. Perhaps Paul Krugman could be correct about the faltering U. S. economy, and at the same time, the U. S. stock market could rise because of greater prosperity elsewhere. Martin Wolf is echoing the same refrain and expressing the same frustrations as Paul Krugman in this article: The political genius of supply-side economics.
    The article, Obama, Republicans spar over jobs, contains the interesting claim that President Obama stated last year that his fiscal stimulus program would generate 1,000,000 more jobs in the near term.
    As China grows, massive hurdles loom  
    The markets are up slightly tonight.

2010-7-23:  Stock markets rose again today, bumping against resistance  The NASDAQ Composite added 23.58 points (1.05%) to finish at 2269.47. The Dow gained 102.32 points (0.99%) to close  at 10,424.62 (Dow within 4 points of erasing 2010 losses), and the S&P 500 regained 8.99 points (0.82%) to end at 1,102.66. Oil ended at $79.05 a barrel, while Gold closed down at $1,187. The VIX fell 1.12 to 23.51.
     Tonight is Friday night and the commentators have gone home for the weekend. All we can say is that the markets closed a little higher tonight than they have for the past month: Stress tests: Seven failures, and Stocks hot after stress test..
    If this has been simply a correction and stocks resume their upward march, it would mean that the global stimulus has been sufficient to re-ignite the global economy, and it would call for a rethink concerning who's right and who's not. But tonight, all we can do is wait and see.
    It may be worth knowing that 70% of all the trading that takes place on Wall Street these days is high-frequency (computer-enacted) day trading. It may also be  worth knowing that news organizations such as Reuters offer high-priced, special information news services for large-scale investors, whose computers automatically evaluate the news as positive or negative. This would seem to me to offer the potential for manipulating the markets by feeding slanted information to these computers, with principals at the news agencies having already bought or sold before releasing their privileged information to their clientele.

2010-7-22:  Stock markets reached for the sky today after good earnings reports and improved outlook statements from both home and abroad: Blue chips leap 200, Economic data power Europe surge. The NASDAQ Composite jumped 58.56 points (2.68%) to finish at 2245.89. The Dow gained 201.77 points (1.99%) to close  at 10,322.30, and the S&P 500 reclaimed 24.08 points (2.25%) to end at 1,093.67. Oil ended at $79.05 a barrel, while Gold closed at $1,195. The VIX fell 1.01 to 24.63.
    My investment advisory service has underscored its existing "buy" recommendation. Of course, it will take follow-through and more than one day to set the stock market on an upward trajectory. And a continuing recovery would fly in the face of many a pundit. 
    In Ben we trust. What this article argues is that Ben Bernanke's remark about an  unusually uncertain outlook for the economy belies the calm assurances that Fed officials have given that the recovery is on track, The article avers that traders reacted to this surprise yesterday, driving down the equity indices.
    Dr. Bernanke reaffirmed his forecast that there won't be a double-dip ahead, and that GDP growth for 2010 will average 3% to 3½ %, and for 2011, will run between 4% and 4½ %.
    Double-dip recession? Not so fast. This article claims that April saw the end of the first, rapid-rebound phase of the recovery , and a shift into the second, slower-growth phase. The article also suggests that the low interest rates on Treasury bonds may lubricate the recovery by encouraging business investment.
    Stock market futures are neutral tonight.

2010-7-21:  Stock markets fell today after less-than-encouraging words from Fed  Chairman Bernanke: Bernanke view riles Street. Dr. Bernanke "failed to articulate any further steps to spur growth, as some had hoped". Fed stands ready to act. The NASDAQ Composite fell 35.16 points (-1.58%) to finish at 2,187.33. The Dow lost 109.43 points (-1.07%) to close  at 10,120.53, and the S&P 500 parted with 13.89 points (-1.28%) to end at 1,069.59. Oil ended at $77.75 a barrel, while Gold closed at $1,192. The VIX added 1.71 to 25.64.
    "Federal Reserve Board Chairman Ben Bernanke said Wednesday that the outlook for the U.S. economy is "unusually uncertain" and that the Fed is willing to do more if growth proved to be weaker than forecast."
      
    Mark Hulbert observes that sharp drops in consumer confidence are more often than not, followed by stock market gains: Consumer confidence for contrarians  

2010-7-21 (Afternoon):  Dr. Krugman has added this item, Permanent Link to Remote Control, about the way the media distort reality. An Associated Press article states: "Even though the prospects of deflation — a widespread and prolonged drop in prices for goods, the value of stocks and homes and in wages — is remote, some Fed officials are worried about it." Dr. Krugman asks: how remote is deflation is, given this chart?



2010-7-21 (Morning):
    Paul Krugman's charts showing that FDR's "New Deal" paid for itself (Permanent Link to Depression Debt) suggest a little further attention:
.
    Incidentally, the reason that the national-debt-as-a-percentage-of-GDP exploded during the Hoover Administration wasn't because the Republicans were spending so much but because the country's GDP was falling so fast. And the reason that national debt leveled off when the FDR Administration was spending so much on fiscal stimulus was because the country's GDP was rising so fast.
    Dr. Krugman also included a chart (Permanent Link to More Depression Debt, see below) showing the cost of servicing the national debt under FDR:

    The cost of servicing the national debt peaked the year FDR took office.
    In my experience, there's a great deal of public confusion over the national debt. For decades, if you wanted to make mail order money, all you had to do was warn about the way politicians kept adding to the national debt each year, spending more and more annually, rather than paying down the national debt. "This fiscal folly can't continue!" you would thunder. "The country is on its way to bankruptcy, and for only $99.95 a year, I'll show you how to survive and prosper during the coming economic breakdown." But of course, politicians can safely keep adding to the national debt each year as long as long as the ratio of national-debt-to-GDP doesn't rise. Also, interest rates play a role. Relatively low interest rates mean relatively low costs to the government of servicing the national debt.
    The three squibs below recount Goldman Sachs forecasts for the economy. 
    Four days ago (Permanent Link to De Facto Double Dips), a Goldman Sachs analyst estimated the growth in GDP for the second half of 2010 at 1½ %. 
    Two days ago, another Goldman Sachs research report (Permanent Link to Why I Worry) estimated that the federal fiscal stimulus program has added 2½ % annualized to the U. S. economy through last month. Going forward, they estimate that GDP growth during the last half of 2010 and the first half of 2011  will be about 2¾ % less than it was in the first half of this year provided that 
    (1) additional federal aid is provided to state and local governments to help them through this "time of troubles"; 
    (2) unemployment benefits are extended; and
    (3) Most of the Bush tax cuts aren't allowed to expire this year.
    This morning, Goldman Sachs has concluded (Permanent Link to Fiscal Drag) that federal aid to state and local governments won't be forthcoming, and that that will subtract almost another percent from the rate of growth of GDP over the next year... or not quite 3¾ % less than it was in the first half of this year.
      Does that sound like recession?

Later:  The Fed is forecasting GDP growth of 3% to 3.5% this year, while private economists are projecting 2.6%.

2010-7-20:  The markets rose again today: Fed speculation lifts stocks.  The NASDAQ Composite gained 24.26 points (1.1%) to finish at 2,222.49. The Dow climbed 75.53 points (0.74%) to close  at 10,229.96, and the S&P 500 added 12.23 points (1.14%) to end at 1,083.48. Oil ended at $77.75 a barrel, while Gold closed at $1,192. The VIX subtracted 2.04 to 23.93.
    Mark Hulbert writes, Deflation camp gets powerful new ally. Jeremy Grantham has converted from worrying about inflation to worrying about deflation.
    U.S. 10-year yields fall to new 15-month low of 2.9% interest. This isn't automatically a harbinger of deflation. It could also signal greater fear and a flight to safety.  
|   Double dip is doubly certain: Robert Murphy    
    Irwin Kellner: Too much, too soon. Dr. Kellner has joined the ranks of the double-dip forecasters. (It's worth noting that he correctly predicted the rebound in the spring of 2009.)
    Michael Ashbaugh: U.S. benchmarks confirm primary downtrend.    
    Not everyone expects a double-dip recession: Mark Luschini on double-dip odds. Canada, in better shape than the United States, has just raised interest rates for a second time: Bank of Canada raises interest rates (to 0.75%).
    Also, relevant to Moody's downgrading of Irish sovereign debt (Moody's cuts Dublin's debt): Irish bond auction goes well 
    Meanwhile: Senate poised to extend jobless benefits. 
    Brett Arends: Crocodile tears for the rich explains that "according to an analysis by the Central Intelligence Agency, the U.S. has one of the most unequal income distributions in the world. The U.S.? Our income distribution is more in line with Zimbabwe, Argentina, and El Salvador. As for all those millions out of work: Maybe they can get jobs as servants." 
    Paul Krugman has two very interesting charts tonight in Permanent Link to More Depression Debt. The first chart shows that the national-debt-to-GDP ratio rose rapidly under President Hoover's conservative program, and didn't rise under President Roosevelt's lavish stimulus program. The reason? GDP rose faster than the national debt, allowing the ratio to remain essentially constant. This highlights the (in my opinion) dangerous current fallacy that if we keep running up deficits, it will increase the national-debt-to-GDP ratio. In the first place, about one-third of the money spent to stimulate the economy will end up back in the Treasury because of income taxes, and in the second place, if the money is wisely spent, the boost in GDP may more than offset the rise in the national debt. (The U. S. national debt is currently about 40 times as large as it was at the end of World War II, but what counts isn't the absolute value of the national debt but the debt-to-GDP ratio.) This isn't like borrowing money to take a trip to Tahiti. This is (or can be,, I think, if spent on competitive infrastructure) like borrowing money to invest in new equipment to boost corporate revenue and profits.


    Farrell: Goldman's dream-inception technology  

2010-7-19:  The markets rose today. Stocks rebound after slide The NASDAQ Composite gained 19.18 points (0.88%) to finish at 2198.23. The Dow climbed 56.93 points (0.56%) to close  at 10,154.43, and the S&P 500 added 6.37 points (0.6%) to end at 1,071.25. Oil ended at $76.46 a barrel, while Gold closed at $1,184. The VIX subtracted 0.28 to 25.97.
    You may recall that Dr. Krugman cited Ireland as a country which embraced austerity two years ago, and which should, if the deficit hawks are correct, because of their fiscal austerity be enjoying higher credit ratings than the other four PIIGS (Portugal, Ireland, Italy, Greece, and Spain): Moody's cuts Dublin's debt. Dr. Krugman took issue with that claim and noted that Ireland's sovereign debt was no more highly regarded than that of Spain or Portugal.
    The rest of these articles are self-explanatory.
    Hungarian assets tank as IMF, EU talks collapse  
    Premier trumpets China's economic slowdown  
    Buy and hold is getting old  
    My investment advisory service clearly made an ill-timed call when it recommended buying into this rally. It considers the markets to currently be in a trading range from which they will break out above or below. Unfortunately, that has all the predictive potential of a fortune cookie.
    My personal bias is that it's time to be in cash until the future direction of the economy is more easily discernible.
    Here's another up-to-date Goldman Sachs assessment of what to expect from the U. S. economy:
    "By our estimates, (federal) fiscal policy has contributed +2½ percentage points (annualized) to real GDP growth from early 2009 to mid-2010. From mid-2010 to mid-2011, we estimate an impact of about -¼ percentage point—i.e. 2¾ percentage points less than before—even under our baseline assumptions of extended unemployment benefits, more aid to state governments, and at least a temporary extension of the bulk of the 2001-2003 tax cuts. We need a lot of improvement in private sector activity to offset this swing, and at the moment it unfortunately doesn’t look like we’re getting it."
    This is taken from today's Paul-Krugman commentary: Permanent Link to Why I Worry.
    Market futures are slightly negative tonight.

Summarizing the State of the Economy

Saturday, July 17, 2010

    Here is an excellent up-to-the-minute posting by Dr. Paul Krugman:

De Facto Double Dips

In other words,

(1)  the fiscal stimulus is expiring,
(2)  the boost from the restocking of inventory is expiring, and
(3)  there is an additional, unexpected slowing of growth adding to the first two contributions.
    
    As Dr. Krugman observes, a 1½ % growth rate will be insufficient to offset population growth, much less reduce the unemployment rate.
    This assumes that Goldman Sachs doesn't further reduce its forecasts later in 2010 or in 2011.
    It seems to me that fiscal stimulus is politically dead in the water*, leaving only previously untested tricks by the Fed to boost the economy.

* - If I were a Republican strategist, I believe I would be arguing that it's less than four months to the November elections, and that it's imperative that Republicans wrest power away from President Obama. Bipartisan actions for the hypothetical good of the country would be off the table until after the elections.

The Bottom Line: If Goldman Sachs is right, then a continuing recovery, if it occurs, will be a Potemkin Village. 

    I've also reviewed Paul Krugman's advice in early 2009. The stock market bottomed on March 6, 2009. By March 30th, several influential commentators were calling it a new bull market. However, on April 17th, Paul Krugman was comparing the rally to the sucker's rally that occurred during the Great Depression. He miscalled the March-May leg of the 2009 stock market rally, and it wasn't until May that he said as much. 
    It was around the 18th of April that I lost faith in his predictions concerning what was going to happen to the stock market.
    On the other hand, right now, his 2009 forecasts of what would happen economically about now appear to be spot on. But over the next few months, we should learn who's right and who's not.

    The following links connect to recent Paul Krugman commentaries on topics related to what's happening now.

In Permanent Link to Conventional Madness, Revisited, Dr. Krugman cites the forecast by the Organization for Economic Development and Cooperation two months ago, that called for immediate fiscal austerity coupled with "a sharp rise in US interest rates over the next year and a half". This was based upon a temporary rise in the "TIPS spread", followed by a recent plunge in the "TIPS spread". Dr. Krugman concludes, "I eagerly await the OECD’s retraction of its previous policy advice."

In Iraq: Austerity, Updated, Dr. Krugman says,

2010-7-16:  The markets took a swan dive off the end of the dock today: Flight from stocks. The NASDAQ Composite careered 70.03 points (-3.11%) to finish at 2179.05. The Dow toppled 261.26 points (-2.52%) to close  at 10,098.05, and the S&P 500 added 31.60 points (-2.88%) to end at 1,064.88. Oil was unchanged at $75.87 a barrel, while Gold ended at $1,192. The VIX added1.27 to 26.41.
    Today saw quite a contraction, and I don't as yet have any guidance regarding how serious today's downturn was. Three pieces of bad news drove it: Consumer sentiment dives, and Too-freaky Friday, and U.S. consumer prices retreating in June.  

2010-7-15:  After spending most of the day in bear country, market indices climbed in the last half hour to a mixed close: Worries weigh on stocks. (Tomorrow is an options expiration day).  The NASDAQ Composite gave up 0.76 points (-0.76%) to finish at 2249.08. The Dow dipped 7.41 points (-0.07%) to close  at 10,359.31, and the S&P 500 added 1.31 points (0.12%) to end at 1,096.48. Oil was unchanged at $76.89 a barrel, while Gold ended at $1,208. The VIX added 0.25 to 25.14.
    Meanwhile, in the interest of confusing investors, Tomi Kilgore writes, Don't be fooled by another breakout. In that pessimistic vein, U.S. factories slow down, and  U.S. stocks drop along with views of recovery, while on the other hand: An optimistic view from MAPI data,  Industrial output rises 0.1%, Initial jobless claims fall, and June's core PPI rate increases 0.1%. Welcome to the Tower of Babble!
    My investment advisory service welcomes a pullback in order to relieve a short-term overbought condition.
    Here are two articles abut China: China's economy on course for 'soft-landing' and Double-digit growth may end for a while.
    Stock market futures are neutral tonight.

2010-7-14:  The markets closed flat today after their recent run-ups. The NASDAQ Composite added 7.81 points (0.35%) to finish at 2249.843. The Dow increased 3.7 points (0.04%) to close  at 10,366.72, and the S&P 500 dropped 0.17 points (-0.02%) to end at 1,095.17. Oil fell to $76.60 a barrel, while Gold ended at $1,211. The VIX added 0.33 to 24.69.
    The Fed is mulling Stimulus plans just in case the economy fails to continue to flag.
    Mark Hulbert writes, Market gain suggests rally has legs.  
    In China postures for the New World Order, Todd Harrison opens the article by mentioning that China's leading credit agency stripped America, Britain, Germany, and France of their AAA credit ratings. He mentions that the chief of the International Monetary Fund has remarked that, "Asia's time has come".
    Market futures are slightly positive tonight.

2010-7-13:  The markets advanced nearly 2% today, apparently based upon promising earnings reports and guidance going forward: Earnings cheer sparks rally. The NASDAQ Composite added 43.67 points (1.99%) to finish at 2248.03. The Dow increased 146.75 points (1.44%) to close  at 10,363.02, and the S&P 500 climbed 16.59 points (1.54%) to end at 1,095.34. Oil rose to $77.16 a barrel, while Gold ended at $1,213. The VIX fell 0.44 to 24.54.     
    My investment advisory service gave a "buy" signal today based upon the indicators in their model.
    Here are two other articles dealing with gold: Gold rebounds on Portugal's downgrade, and The gold stock the smart money is buying.

2010-7-12:  With the first earnings report for the quarter (Alcoa's) due out after the close, the markets finished the day about where they started. The NASDAQ Composite added 1.91 points (0.09%) to finish at 2198.36. The Dow increased 18.24 points 0.18%) to close above 10,000 again at 10,216.27, and the S&P 500 climbed 0.79 points (0.07%) to end at 1,078.75. Oil fell to $74.85 a barrel, while Gold ended at $1,200. The VIX fell 0.44 to 24.54.   

Taking Issue with Paul Krugman
    In this article by Josef Joffe, Mr Joffe, who is editor of "Die Zeit", disagrees with Paul Krugman's thesis that the Europeans are more concerned about reducing their debt than about recovery from the recession. He states, 
    "Good Keynesians, they’re merely reducing their astronomical deficits, not eradicating them. They intend not to slam on the brakes, but merely to ease up on the accelerator. It’s deep-red deficits as far as the eye can see. 
    "What about the European Central Bank, the Fed’s counterpart? Tight money poisoned the fitful recovery during the Long Depression, and it triggered the GreatDepression after the collapse of the Austrian Creditanstalt. Today, the world is awash in liquidity while interest rates remain at rock bottom, where they will stay. " 
    He also observes that the present social safety net affords hugely more protection from economic slumps than did the policies of the 19th century when the "Long Depression" occurred, or even the 20th Century's Great Depression.
    One point that he and others are making is that "The U.S. will run a deficit of $1.5 trillion this year, and unemployment has hardly budged." It's been my understanding  that employment doesn't begin to rise until well after the nadir of an economic cycle. In April ,there were the first glimmerings of a rebound in employment, but given the slump since then, those plans have probably been tabled. Employers would probably want to make quite sure that demand had begun to rise, and that it could be expected to continue to rise before they went out and rehired.

This debate is framed in bold colors rather than in pastels 
    Nobody's tiptoeing around this economic debate. There are going to be some decisive winners and decisive losers. Paul Krugman gives a box score over the past year-and-a-half: Permanent Link to What Have We Learned?. 



    The argument at that time was over whether or not we were facing galloping inflation or disinflation. The charts above give the answer..
    In this piece, Permanent Link to Trending Toward Deflation, Dr. Krugman finds that we're already on the ragged edge of deflation.

Continuing Recovery?
    Marketwatch' Forecaster of the Month is predicting a slowed but continuing recovery:  More pluses than minuses.
    Stock market futures are up a bit tonight, probably on the heels of good earnings and good forward guidance from Alcoa, CSX, and MBIA (Municipal Bond Insurance Corporation).

2010-7-11:  As investors, we need to "get it right"
    I need to guard against letting any biases I might have interfere with arriving at correct answers concerning what's going on economically. In that vein, it may help to review the predictions that Warren Buffett, Todd Harrison, and Paul Krugman made last year regarding what would happen to the economy later last year and this year.
    Offhand tonight, I don't remember what forecasts Warren Buffett made last year except that I don't believe he sidestepped the meltdown that occurred between October, 2007, and September, 2009. (I'll try to check on this tomorrow.)
    Todd Harrison warned of the "widow's peak" that was going to occur any day now back in the summer of 2009. It didn't happen, and if it happens now, it doesn't count, at least in my book.
    In early 2009, Paul Krugman warned that the recovery wasn't going to get off the ground, while stock market gurus were claiming that proclaiming that it was underway, and that was the time to be buying stocks. They were right and Dr. Krugman was wrong. In May, he quietly agreed that a recovery was in progress.
Bottom Line:  None of the three got it right last year, although the Fed was correct in supporting the ongoing-recovery thesis.
    My investment advisory service is getting more pessimistic. The intermediate-term trend is down. It would take a close above 1,080 (only 2 points above Friday's close) to break above the current resistance level, and open the door to further advances. But my investment advisory service is driven by its models and their indicators, and will depend upon their numbers to buy if the models say "buy" and sell if the models say "sell". Although it would be valuable to know whether the economy is going to rise or fall from here, it isn't necessary to second-guess what the economy's going to do in order to know when to buy and when to sell.
    Stock market futures are down a few points tonight.

2010-7-9:  
Is this rally a "dead-cat bounce" that's not worth trading?
    My investment advisory service is warning that so far, the current rally is looking technically like a "dead cat bounce" rather than a change in direction, and so far, it doesn't deem the rally to be worth playing. 
    The NASDAQ Composite added 21.05 points (0.97%) to finish at 2196.45. The Dow increased 59.04 points 0.58%) to close above 10,000 again at 10,198.03, and the S&P 500 climbed 7.71 points (0.72%) to end at 1,077.96. Oil oozed up $0.82 to $76.26 a barrel, while Gold ended at $1,211. The VIX fell 0.733 to 24.98.
Three schools of thought regarding the current slump:
    (1)  The IMF, the Federal Reserve, Warren Buffett, and Henry Paulson's Advantage Funds are predicting that the stimulus has worked and the recovery will slow, but will continue. 
    (2)  David Stockman and Todd Harrison are arguing (I think) that this is a plain, old-fashioned boom-bust cycle, and that the markets need to be allowed to recover without government intervention. (Presumably, there'll be a second leg of recession.) Otherwise, the economy will be right back where it started  in 2007, without paying down the enormous debt overhang that got us in this fix in the first place. Furthermore, "to get through it we have to go through it", and all the King's horses and all the King's men can do is to delay the inevitable day of reckoning.
    (3)  Paul Krugman has become the iconic lightning rod for a third position: namely, that we're on the brink of the U. S.' third Depression.
    This may be an oversimplification... for example, David Stockman may not have objected to FDR's fiscal stimulus program... but it gives us a framework to launch a discussion.
    Let's start with the Great Depression and see if we can get an idea regarding what actually happened. One school of thought (the Milton Friedman or "Chicago" or "monetarist" interpretation?) is that the driver of the Depression was the Fed's monetary policy: the Fed didn't "print" enough money fast enough from 1929 to 1932 to keep the Depression from getting out of hand. 
    David Stockman arrives at a different answer. 
David Stockman's Different Answer:
(1) What caused the Depression:
    The probable cause of the Depression, he thinks, was the unsustainable, debt-fueled boom of the Roaring Twenties. The 1920's saw the shift from public mass transportation to personal automotive transport. It also saw (I suspect) the rise of the suburbs, riding on the back of this new private transport system. A whole new generation of appliances from radios to refrigerators was manufactured and sold to a growing middle class. 
    This booming economy caused an over-investment in production and service capacities in response to the perceived market for goods and services. "In short, the Great Depression had nothing to do with fiscal policy mistakes because the "fiscal" [component] in question was self-evidently too small to make a difference. Instead, it was the product of a classic boom and bust cycle that originated in the inflationary finance policies of central banks -- first to fund the carnage of World War I with printing-press money and then to layer on the speculative merriment of the Roaring Twenties."
(2) New packaging of risk:
    "...Main Street Americans were introduced to the twin wonders of consumer installment credit and stock market margin accounts during the 1920s." 
    Consumer installment buying would have greatly expanded the potential for indebtedness for the "farm kids" moving into the cities from the country. Further, stock margin rules allowed 10:1 leveraging, permitting investment rookies to build highly unstable "houses of cards", setting the stage for the Crash of '29.
(3) The role of the Fed:
    With respect to fiscal influence, he reports that the federal government increased its spending by 50% between 1929 and 1932, from a mere 3.1% of GDP to a mere 4.6% of Gross Domestic Product (GDP) in 1932... both negligible contributions to the GDP. At the same time, the "stock of money fell by nearly 25% from late 1929 to January 1933 not because the Fed didn't make the reserves available but because, then as now, "the Fed found itself 'pushing on a string' in the face of massive loan liquidation owing to defaults and working capital contraction -- the same headwinds thwarting the Fed's hyperactive money string pushing today."
Bottom Line: David Stockman argues that the Fed was responsible for setting up the debacle from late 1929 to early 1933, but not for what happened during that collapse: i. e., Milton Friedman was wrong.
My own memories of the era:
    This picture squares with my own memories of the thirties and early forties. I can't remember seeing new construction before World War II. Also, in retrospect, a lot of what I saw around me in the 30's had been created in the 20's. 
    To give an idea just how bad the contraction was between 1929 and 1932, the Dow-Jones industrial Average fell from a high of 381 in the summer of 1929 to 41 in the summer of 1932.
Franklin Delano Roosevelt (FDR) and the New Deal
    Mr. Stockman has given one interpretation of the interval from late 1929 to January, 1933. What about the period after that from 1933 to World War II?
    Early in 1933, FDR announced his radical fiscal stimulus program, setting up various public works programs and guaranteeing sober men a job with, e. g., the Works Progress Administration (WPA: "We Poke Along"). A WPA job paid $50 a month, or about $9,000 a year by today's standards. It kept families from starving, but it didn't make them affluent. The Civilian Conservation Corps (CCC) was also established, providing jobs for young men just entering the work force. And there were other programs such as the Tennessee Valley Authority (TVA), which built dams and power-plants that provided flood control for the Tennessee River, and electrified the rural South. (TVA's rates are still well below those of most parts of the country. TVA is a federal agency.)
    Did it work? I'd say it worked resoundingly well. The economy, which had been sinking like a stone, as shown in the "Four Bad Bear Markets" chart below, suddenly began to rebound rapidly. Between 1933 and 1936, the stock market rose from 41 in 1932 to 200 in 1936. The change was dramatic, with no indication, in my opinion, that the cause was anything other than the FDR Administration's fiscal stimulus policies.
    In 1937, FDR & company made a terrible mistake. They listened to the deficit hawks and throttled back their expensive reconstruction programs. It was too early. The economy fell back into depression. Finally, in 1941 came the huge fiscal stimulus program called "World War II". After the war ended in 1945, after 16 years of deprivation, the economy boomed. Most of the nation's durable goods had to be replaced, and this was seamlessly followed by the "baby-boom".
    One of the analogies to the current efforts to jump-start the economy has been likened to trying to get a car up an icy hill by giving it a running start. If the car isn't moving fast enough when it starts up the hill, it may fail to reach the top, and may slide back down with potentially disastrous consequences.
    I think a closer analogy might be that of trying to re-light a big log when the fire has gone out. You have to pony up enough kindling to heat the log enough that it begins to burn again on its own. 
    This failure of FDR to complete what he started has been used to claim that fiscal stimulus doesn't work, and is being trotted out now to argue that fiscal stimulus never works (see: The New Direction Our Economy Is Headed), and that the current fiscal stimulus program has been a total failure.

To be continued.

2010-7-8:  The markets followed through modestly on yesterday's "relief rally"(?) The NASDAQ Composite powered upward 15.83 points (0.74%) to finish at 2175.40. The Dow gained 120.71 points 1.2%) to close above 10,000 again at 10,138.99, and the S&P 500 advanced 9,98 points (0.94%) to end at 1,070.25. Oil hopped $1.20 to $75.69 a barrel, while Gold ended at $1,196. The VIX fell 1.13 to 25.71.
    The two IMF articles below express the International Monetary Fund's projections that although the recovery may be slower than anticipated, the world's economies won't shift into reverse gear again: IMF thinks it's going to be OK, and World GDP to grow 4.6%.
    IMF warns against budget cuts refers to the "Washington-based" IMF warnings that European governments should be careful about cutting their budgets in the immediate \future because of the danger of derailing the economic recovery.
    Income Gaps Between Very Rich and Everyone Else More Than Tripled In Last Three Decades, New Data Show  
    Market futures are neutral tonight. 

2010-7-7:  The NASDAQ Composite powered upward 65.59 points (0.313%) to finish at 2159.47. The Dow vaulted 274.66 points 2.82%) to close above 10,000 at 10,018.28, and the S&P 500 advanced 32.21 points (3.13%) to end at 1,060.27. Oil hopped $2.50 to $74.49 a barrel, while Gold ended at $1,204. The VIX fell 2.67 to 26.98.
    President Reagan's budget director, David Stockman, has written this cogent and insightful article about the Great Depression: Inconvenient facts about austerity. In the article, he takes to task Nobel Laureate Joseph Stieglitz for claiming that federal spending cutbacks caused the Great Depression, adding, "Perhaps you might want to copy Professor Krugman while you're at it." He observes that federal spending in 1929 was a mere 3% of the nation's GDP ($104 billion in 1929). Furthermore, rather than falling, federal spending increased from $3.1 billion in 1929 to $4.6 billion in 1932, shifting from a sizable surplus. Instead (the author argues), the total value of private-investment-plus-durables-consumption-plus-exports fell from $32 billion in 1929 to $7 billion in 1932. He states that the Fed's easy-money policies in the '20s spawned a bubble: "But by 1929, the Fed had created such a massive bubble on Wall Street that corporations could obtain both equity and debt capital virtually for free. Consequently, industry got massively overbuilt, speculative real estate development was rampant, and inventory accumulation reached precarious levels." He continues, "In short, the Great Depression had nothing to do with fiscal policy mistakes. Instead, it was the product of a classic boom and bust cycle that originated in the inflationary finance policies of central banks -- first to fund the carnage of World War I with printing-press money and then to layer on the speculative merriment of the Roaring Twenties." "Thus, the fact that the stock of money fell by nearly 25% during the same period wasn't due to a policy mistake by the Fed in its provision of reserves; rather, the Fed found itself 'pushing on a string' in the face of massive loan liquidation owing to defaults and working capital contraction -- the same headwinds thwarting the Fed's hyperactive money string pushing today." 
    His conclusion is the same as Todd Harrison's: our current problems stem from the creation of an enormous debt bubble encouraged by the easy-money policy of Alan Greenspan's Fed. Now (he says) we have to take our medicine. 
    Workers' salaries lost ground in past decade  

2010-7-6:  After moving up and then down and then partway up again, the markets closed up a bit today. The NASDAQ Composite inched up 2.09 points (0.1%) to finish at 2093.88. The Dow gained 57.14 points 0.59%) to close at 9,743.62, and the S&P 500 annexed 5.48 points (0.54%) to end at 1,028.06. Oil dropped $0.11 to $72.16 a barrel, while Gold ended at $1,195. The VIX fell 0.47 to 29.65.    
    Dr. Irwin Kellner's Perched between growth and recession makes for interesting reading. He basically agrees with Paul Krugman that fiscal restraint right now is an invitation to the W-shaped recovery that he forecast a year ago: "See my column of Aug. 11, 2009.", his confirmation of last year's predictions: "See my column of Aug. 11, 2009.", and last week's update: "See last week's column."..
    Hulbert: Contrarian indicator blinks bearish  
    Looming wave of estimate cuts  
    S&P to 1,500? 
    David Weidner poses Five burning questions for Wall Street 
    Michael Ashbaugh alludes to the S&P 500's resistance at the 1,040 and 1,060 levels: S&P's pop quiz 
    Paul Farrell writes Conspiracy of Weasels is killing real reform concerning bank reform.
    Market futures are down modestly tonight.

2010-7-5:  The markets have now closed below their 200-day moving averages and their 300-day moving averages. As this article recounts, it wouldn't take much to initiate another bear market drop (down 20% or more): Stocks: Pursued by a bear, and Vulnerable spot for market.  
    This article argues that, given that employment numbers are weak, Watch for GDP weakness.  
    This week's issue of Time Magazine includes an article entitled, "The Best Laws That Money Can Buy". The article discusses the lobbyist explosion in Washington, mentioning that, "In the 80's, when lobbying was a cottage industry compared to what it is today, so many lobbyists swarmed the corridors like the one outside the conference room that the press dubbed the halls Gucci Gulch." Tens of thousands of lobbyists now wheel and deal over our legislation. For example, the legislation creating the Federal Trade Commission amassed 8 pages in 1914. The 1935 Social Security Act ran to 28 page. The current Financial Reform Bill resides in 2,319 pages of weasel-wording and legalese. Obviously, no Congress(wo)man knows what's in that bill. It had to have been written by teams of lobbyists. There aren't enough Congressional Assistants to handle the task in the time available. It mentions the fact that "our democracy has become a game for insiders".
    Stock market futures are down ⅔ % tonight. 

2010-7-2:  The markets closed a little lower again today: Stock-fund gains dissolve as 2010 turns perilous: The NASDAQ Composite dropped 9.57 points (-0.46%) to close at a new low for the year at 2091.79. The Dow declined 46.05 points -0.47%) to close at 9,686.48, and the S&P 500 dipped 4.79 points (-0.47%) to end at 1,022.58. Oil dropped $0.68 to $72.27 a barrel, while Gold rose to $1,212. The VIX fell 2.74 to 30.12.
    The story of the day was the jobs report: It could've been worse: "The unemployment report wasn't as grim as it might have been, but it still showed an economy struggling to find firm footing."

2010-7-1:  The markets closed a little lower today: Dollar's drop is the real story of Thursday's glum data, and Stocks at new 2010 lows. The NASDAQ Composite dropped 7.88 points (-0.37%) to close at a new low for the year at 2101.36. The Dow declined 41.49 points -0.42%) to close at 9,752.53, and the S&P 500 doffed 3.34 points (-0.32%) to end at 1,027.27. Oil dropped $2.89 to $72.74 a barrel (Slowdown fears slam oil), while Gold collapsed to $1,198. The VIX rose 1.68 to 32.86.
    On technical grounds, market mavens are predicting a new S&P 500 bottom in the upper 800's, although after six straight days of declining markets, there are widespread predictions of a short-term technical bounce. (Might that be a good time to sell, and buy puts?)
    But Morningstar says: Take Managers' Gloomy Forecasts With a Grain of Salt, and Don't Get Spooked by Jobs Report.
    I bought shares of the Proshares Ultrashort S&P 500 ETF, SDS, today but sold them when the markets began to climb again.
    Tomorrow's job report for June has the herd restless and on edge. 
    It's time to protect stock portfolios now  
    Financial reform bill falls short  
    Stock market futures are up a bit tonight.